All Hands-On Deck Part II – Alternatives to the State-Run IRA Programs

It seems that we Americans would rather spend than save, especially since almost 60% of us don’t have a retirement plan according to a 2019 Aspen Institute report. And with the increase in gig workers and freelancers, the number of workers without a retirement plan is expected to grow.

The situation among small businesses is especially concerning. The smaller the company, the less likely it is to have a profit-sharing or 401(k) plan. There are over 30 million small business in in the U.S., and about 80% to 85% of them do not have a plan.

This has created a huge savings gap in the United States.

Who’s going to step up to correct this problem?

What about government? Governments at both the national and state levels are out to help more workers gain access to retirement plans.

What have they been doing?

Federal Start-Up Tax Help

Congress has recognized the problem and three years ago passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).

One of the provisions in the SECURE Act provides tax credits for eligible small businesses that set up a new 401(k) or similar type of qualified defined contribution plan for their employees. The credits are designed to alleviate some of the startup costs for the plan, with an extra credit if auto-enrollment features are included in the plan design.

  • Startup Credits. A credit of up to $5,000 per year for three years to offset startup costs for adopting a new 401(k) plan, Simplified Employee Pensions (SEPs), and SIMPLE IRAs. 403(b) plans are not eligible for the credit.
  • Auto-Enrollment Credits. An additional $500 tax credit per year for adding an automatic enrollment feature to a new or existing 401(k) plan for three years after the features is added.

The tax credits can be as much as $5,500 a year, or $16,500 over three years for an employer that takes advantage of both credits.

That’s enough of an incentive that it should catch the eyes of small business owners.

State-Run Program Small Successes

But Federal action may not be enough.

So, some states decided to offer their own retirement plans and have mandated participation. The movement started with three states – Oregon, Illinois, and California – who have gone “live,” with more on the way.

As of December 31, 2021, 14 states and two cities (both NY City’s and Seattle’s programs are on hold) have passed laws requiring private-sector employers to enroll their employees in state-sponsored retirement programs unless they offer a retirement plan of their own.

The state-run programs have had some success. According to Massena Associates LLC in a May 5, 2022, blog, more than 460,000 participant accounts have been established in the state-run programs in the three states with active programs, accumulating almost $500 million in assets in 20,400 payroll deduction programs.

But it’s not all sunshine in the state programs. Employers are required to participate in the state-run programs and can’t opt out unless they decide it would be better to offer an employer-sponsored plan, but employees can opt out at any time, and many employees are so choosing. Almost one-third of employees – 32% as of March 31, 2022 – have opted out of the state programs

A growing number of small business owners don’t like the state-run program but are on the fence as to what to do since they think offering a retirement plan on their own costs too much and is too burdensome.

They’re just waiting for you to talk with them about their options.

Private Sector Alternatives

Although the laws in California, Oregon, and Illinois require employers to participate, the same laws allow employers to opt out of the state programs if they adopt a private plan for their company.

The private sector has alternatives to the state-run programs, programs that don’t have to cost an arm and a leg. Table 1 shows seven alternative plans (five defined contribution and two defined benefit plans) that employers can use instead of the state-run programs.

Employers who don’t like the idea of state-run programs have alternatives including:

  • Sponsor a defined contribution plan such as profit-sharing, 401(k), or Safe Harbor or Roth plan (Table 1). Employers often have doubts about taking this step because they think these plans are too expensive and complex to administer. But technology is making plan setup and administration simpler and therefore more affordable for small businesses. RMC Group’s PlanGen Pro system is ideal for simplifying plan administration, and the federal tax credits for small plan start-ups of up to $5,000 per year for the first three years makes setting up a plan much more affordable.
  • Sponsor a pension or cash balance plan (Table 1). Yes, these plans are more complex and expensive to administer, particularly because funding is determined by actuarial calculations and the final benefit is frequently a combination of age, service, and/or salary. But technology is coming to the rescue of these plans as well, and they’re seeing a resurgence in popularity with the aid of efficient administrative platforms such as RMC Group’s PlanGen Pro and the ability to provide superior benefits that are guaranteed for life.
  • Sponsor a simpler plan than those above, such as a SoloK or Simple 401(k) (Table 1). These plans are for owners of very small businesses and particularly favor those owners.

It’s good news that the private sector is able to come up with alternative solutions. Those solutions come in the form of defined contribution plans such as profit-sharing and the popular workhorse 401(k) plan which form the foundation of private sector plans.

Fortunately, the adoption of 401(k) plans will continue to grow. Aaron Schumm, CEO of Vestwell, writing in benefitsPro on December 21, 2021, said it’s been projected that the small plan 401(k) market will grow by 111% and there will be over 1,000,000 401(k) plans by 2025. Also, that the number of small businesses that set up new 401(k) plans is estimated to grow by over 100,000 new plans a year beginning in 2025.

This should help bridge the savings gap.

You’re An Important Deck Hand

As an advisor, you have an important role to play. Many small employers think profit-sharing and 401(k) plans are too expensive. And they often don’t know about the SECURE Act’s start-up tax credits.

A profit-sharing plan has many benefits not available under a state-run plan.

An important feature with a profit-sharing plan is that a business owner can save for his own retirement and employees can receive employer profit-sharing contributions, something they wouldn’t have under a state plan

Business owners in those three states where the IRA programs are already active need to know they have choices – better alternatives – for them and their employees. Even if they’re already enrolled in their state’s plan, they can opt out of it by adopting a profit-sharing plan from you.

In addition to helping your clients, you can also help yourself by becoming a trusted advisor to your clients.

What’s Next?

Some experts in the retirement plan industry are concerned that a voluntary retirement system hasn’t been enough to close the savings gap. So, the idea of government-mandated retirement plans, including a federal mandate, has spread across the country. Others think that a federal mandate is going too far, and that expanded tax credits and expanded plan options will have a better chance of passing through Congress.

The mandate debate is raging in Congress and among the retirement plan community, but so far Congress hasn’t enacted a federal mandate.  Keep your eyes peeled for what’s included in SECURE 2.0, however. You never know what gets slipped in at the 11th hour.

We’re Deck-Hands, Too

We in the Pension Division at RMC Group specialize in working with advisors who serve the small plan market. With our PlanGen Pro system, we can help you market, set up, and administer your clients’ profit-sharing or other qualified plan. You have an opportunity to shine in the states with mandated retirement plans by showing the superior benefits a profit-sharing plan offers.

Call 239-298-8210 or visit our website at to discover how we can partner with you to help small businesses successfully set up and administer a profit-sharing plan.

So, gear up! It’s all hands on deck to give small business owners attractive retirement plan choices!