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State-Mandated Retirement Plans: A Detailed Guide

Many states have recognized that retirement planning is vital for the financial wellness and security of American workers. To help more people become retirement-ready, some states have implemented state-mandated retirement plans.

But what is a state-mandated retirement plan, and what does it mean for employers? Here we explain the intricacies of state-mandated retirement plans, employer requirements and how state-mandated plans compare to employer-sponsored plans.

What Is a State-Mandated Retirement Plan?

State-mandated retirement plans, also known as state-sponsored retirement plans, require employers to offer their employees access to a state-based plan.

Most of the time, employers must offer a type of individual retirement plan (IRA). These plans are directly run by the state or managed by a third party. Typically, employers must automatically enroll their employees in this plan or provide them the option to decline being enrolled.

While these state mandates require employers to offer a plan, they aren’t locked into using their state’s specific plan. They can choose a plan they believe is best for their company.

Why Are There State-Mandated Retirement Plans?

State-mandated retirement plans exist to encourage participation in a retirement plan by making the process easier through automatic enrollment. Ultimately, the goal is to increase retirement savings among American households and help more generations become financially prepared for retirement.

So, why are more states now mandating these retirement plans? Unfortunately, multiple generations of Americans are struggling to reach retirement readiness. According to U.S. Census Bureau data, about 50% of women and 47% of men between the ages of 55 and 66 currently don’t have any retirement savings.

A 2021 report by the Center for Retirement Research found that about 50% of U.S. households won’t have enough retirement savings to maintain their standard of living when they retire. Generations who are slowly nearing retirement age, such as Generation X and Millennials, are increasingly worried about being able to retire.

There are many reasons why Americans are struggling to adequately achieve retirement savings. Multiple recessions, the COVID-19 pandemic, rising inflation, and high amounts of student debt have prevented many people from investing in retirement plans.

For workers in private industries, not all have access to retirement plans through their companies. And workers are actually more likely to save for retirement when they have access to an employer-sponsored retirement plan.

A 2022 survey by the Transamerica Center for Retirement Studies found that 88% of workers with access to an employer-sponsored retirement plan at for-profit companies are saving for retirement. But for workers who aren’t offered a plan by their employer, only 46% are saving for retirement.

For American households, retirement savings are much needed. By mandating companies to provide access to a type of retirement plan that’s easy for employees to enroll in, the hope is to help more workers boost their retirement savings.

Which States Have State-Mandated Retirement Plans?

Even though state-mandated retirement plans are gaining attention, only a few states have fully implemented them. Some states have pending legislation for these plans, and other states have been rolling out mandated retirement programs in stages:

Connecticut: The Connecticut Retirement Security Program’s Board oversees a retirement savings program called MyCTSavings. The program offers a state-sponsored plan in the form of a Roth IRA, at no cost to employers. Employers must use this retirement plan or one of their choosing if they have five or more employees who each earn $5,000 or more in a calendar year.
New Jersey: The New Jersey Secure Choice Savings Program Act applies to businesses with 25 or more employees. Employers must have an employer-sponsored retirement plan or offer an automatic payroll deduction of their employees’ pretax earnings to be paid into an IRA.
California: California passed legislation in 2016 requiring employers to participate in CalSavers, a state-run retirement program in the form of a Roth IRA. Employers who don’t offer an employer-sponsored program and have one or more eligible employees must participate.
Illinois: Illinois Secure Choice is a state-facilitated retirement program that uses a Roth IRA. It applies to employers who have five or more employees and who don’t provide an employer-sponsored retirement plan.
Maine: The Maine State Legislature passed “An Act To Promote Individual Savings Accounts through a Public-Private Partnership” in 2021. Unless they already offer a retirement plan, it requires employers with five or more employees to provide their employees with the option to contribute to a Roth IRA via payroll deductions. The rollout of this program started in 2023 and the final phase is scheduled for 2024.
Maryland: Launched in 2022, MarylandSaves applies to employers with one or more employees and who have been in business for at least two calendar years and don’t offer a qualified retirement plan. The plan has employees make contributions to a Roth IRA via automatic payroll deductions.
Colorado: Colorado SecureSavings is a retirement plan in the form of a Roth IRA. If employers with five or more employees don’t offer a retirement plan for their employees, they must register for the program by June 2023.
New York: In 2021, New York State Secure Choice Savings Program was signed into law, offering an IRA retirement savings account. All employers with at least 10 employees and who don’t offer a qualified retirement plan must enroll their employees in the program.
Oregon: OregonSaves allows employees to contribute to a Roth IRA through automatic payroll deductions. Most deadlines to enroll in the program have already passed, and businesses with one to three employees must register by July 31, 2023, unless they already offer a qualified retirement plan to their employees.
Virginia: Opened in 2023, RetirePath Virginia is an automatic-enrollment retirement savings program that makes contributions default to a Roth IRA. The program is mandatory for employers if they have 25 or more employees, have been operating for two or more years at the time of enrollment, and don’t already offer a qualified retirement savings plan.

What Are the Employer Requirements of State-Mandated Retirement Plans?

While the details vary by each state, state-mandated retirement plans tend to share some similar requirements:

Companies above a certain size (such as having five employees or more) must provide their employees with access to a specific IRA plan.
Employees are auto-enrolled in the plan but also have the ability to opt out of the plan.
Employers are allowed to offer their employees access to an alternative qualifying retirement plan through the private market, such as a 401(k), rather than using the state-directed retirement plan.
If qualifying employers don’t participate in a state-mandated retirement plan or offer an alternative retirement plan, they can face hefty penalties and fines.
While state mandates require companies to offer retirement plans, employers aren’t obligated to run these plans or offer matching contributions.

Comparing State-Mandated Plans & Employer-Sponsored Plans

Businesses don’t have to use a state-mandated retirement plan. Instead, they can choose to offer their employees a retirement plan through an independent provider. Whichever type of plan an employer offers, there are pros and cons to each.

Pros of State-Mandated Retirement Plans

Most state-mandated programs allow employers to participate for free and are a low-cost retirement plan option.
Employer contributions to state-mandated plans aren’t required and are, in some cases, not allowed.
Employers aren’t liable for investment decisions in state-mandated plans, as the state plan provider typically takes on the fiduciary duties of managing the plan’s investments.
Since state-mandated plans have simple processes and limited investment menus, they can be easier to implement and understand.

Cons of State-Mandated Retirement Plans

State-mandated plans can have limited investment options and contribution thresholds, which may not meet the needs of your employees.
Since state-mandated plans have little flexibility, employers are limited when it comes to the customization of a plan’s design, which may not align with an employer’s overall business goals.

Pros of Employer-Sponsored Plans

Employer-sponsored plans have more flexibility than state-mandated plans, giving you more investment and contribution options that you can tailor to the needs of your workforce.
In addition to offering a company match, you can add other plan features like loans.
Under the SECURE Act, eligible employers starting a 401(k) may receive tax credits for providing employer-sponsored retirement plans for their employees.

Cons of Employer-Sponsored Plans

Employers are responsible for their plan’s implementation and administrative costs.
There are more compliance requirements for employer-sponsored plans than there are for state-mandated plans.

Choose the Right Retirement Plan for Your Business With BGM’s Nationally-Trusted Advisors

If you’re the owner of a small or midsize business who needs to implement a state-mandated retirement plan, it’s critical to choose a plan that provides good options for your employees while supporting your bottom line.

At BGM, our experienced business advisors can help you determine the right retirement plan for both you and your employees. To get started, call us at 952-844-2500 or send us a message.

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