More and more states are requiring that workers have access to a retirement savings vehicle, and after California, Illinois, and Oregon passed enacting legislation to pass state-mandated auto-IRA programs, some states have begun efforts to follow suit.
If you are a small business owner, this wave of legislation may affect your employees directly: According to the US Bureau of Labor Statistics, nearly 34% of Americans work for firms with fewer than 100 employees.1 States that have mandated retirement plans in place require companies of specific sizes to automatically enroll employees into an IRA or another qualifying private plan.
Why are more and more states enacting auto-IRA plans? Plans have been introduced to address growing concerns around the American retirement gap, and automation is an important component of retirement investment success: While most retail investors can open an IRA or Roth IRA on their own, AARP research shows that Americans are 15 times more likely to save for retirement when they can do so at work.2 Furthermore, workers are 20 times more likely to save for retirement if workplace savings are automatic.2
State-mandated auto-IRAs are a simple way for employees who do not have access to a workplace retirement plan to save for their post-career lives.
Some common features of auto-IRAs include:3
- Roth IRA as the default investment vehicle
- Default contribution rates of 3-5%
- No employer match/contributions permitted due to IRA laws
- Auto-escalation and access to a qualified default investment alternative (QDIA) such as a target date fund
While state-mandated auto-IRAs might be the right solution for some employers, your employees may benefit from an employer-sponsored 401(k) plan.
Here’s what you need to know about the differences between an auto-IRA and offering a 401(k) to fulfill your state’s requirements:
- In 2022, 401(k) contribution limits are $20,500 ($27,000 for those older than 50), while IRA contribution levels are only $6,000 ($7,000 for those older than 50)
- While Roth IRAs have income limits (For 2022, $129,000 for single filers; $204,000 for married filing jointly), there is no income limit for your employees to contribute to a Roth 401(k)
- Depending on where your business operates, there are specific retirement plan adoption deadlines that you will be required to meet to continue operating legally and avoid potential penalties.
Providing a 401(k) plan to your employees has its benefits. Contribution limits are higher, there are no income restrictions on contributing to a Roth 401(k), and you can incentivize your employees to save even more by providing a match.
Plus, a match provides your company with a competitive advantage: According to US Bureau of Labor Statistics National Compensation Survey, of the employers who offer 401(k) plans, over half offer a match.4 In the current job market, attractive benefits are becoming increasingly important to attract and retain top talent. In a study by Prudential, when considering a new job, 54% of workers surveyed said comprehensive benefits were very important to them.5
Morgan Stanley at Work offers small business 401(k) services to help you and your employees reach their retirement plan goals while fulfilling your state’s retirement savings plan mandate. Furthermore, working with a provider like Morgan Stanley also gives your employees access to a Financial Advisor, who can provide educational resources to help your employees gain even more confidence on their retirement journey.
In sum, providing workers access to simple retirement savings vehicles is becoming an increasingly popular legislative priority. As a small business owner, you can help improve the financial future of your employees by providing retirement benefits and leveraging the plan as an effective tool for attracting and retaining industry talent.
Talk to a Morgan Stanley Financial Advisor, and your legal and tax advisors about your options, and what makes the most sense for your business and team.
Morgan Stanley at Work helps build financial confidence through thoughtful education to help individuals embrace their tomorrow, today.