More states are requiring workers to have access to a retirement savings vehicle, and after California, Illinois and Oregon passed legislation enacting state-mandated self-IRA programs ‘state, some states have begun efforts to follow suit.
If you’re a small business owner, this wave of legislation can directly affect your employees: according to the US Bureau of Labor Statistics, nearly 34% of Americans work for companies with fewer than 100 employees.1 States that have mandatory retirement plans require companies of specific sizes to automatically enroll employees in an IRA or other qualifying private plan.
Why are more and more states adopting self-IRA plans? Plans have been introduced to address growing concerns about the US pension gap, and automation is an important part of successful retirement investing: while most retail investors can open an IRA or Roth IRA by themselves, AARP research shows that Americans are 15 times more likely to save for retirement when they can do so at work. Additionally, workers are 20 times more likely to save for retirement if workplace savings are automatic.2
State-mandated automatic IRAs are an easy way for employees who don’t have access to a workplace retirement plan to save for their post-career life.
Some common characteristics of self-IRAs include:3
- Roth IRA as default investment vehicle
- Default contribution rate of 3-5%
- No employer match/contributions permitted due to IRA laws
- Self-escalation and access to a qualified default investment alternative (QDIA) such as a target date fund
While state-mandated automatic IRAs may be the right fit 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 a self-IRA and offering a 401(k) to meet your state’s requirements:
- In 2022, 401(k) contribution limits are $20,500 ($27,000 for those over 50), while IRA contribution levels are only $6,000 ($7,000 for those over 50)
- Although Roth IRAs have income limits (for 2022, $129,000 for single filers; $204,000 for joint filers), there is no income limit for your employees to contribute to a Roth 401 (k)
- Depending on where your business operates, there are specific pension plan adoption deadlines you will need to meet to continue operating legally and avoid possible penalties.
Offering a 401(k) plan to your employees has its advantages. 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 matching.
Plus, a match gives your company a competitive edge: According to the U.S. Bureau of Labor Statistics’ National Compensation Survey, among employers who offer 401(k) plans, more than half offer a match. .4 In today’s job market, attractive benefits are becoming increasingly important to attracting and retaining 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 401(k) services to small businesses for help you and your employees achieve their retirement plan goals while fulfilling your state’s retirement savings plan mandate. Plus, 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 in their retirement journey.
In short, providing workers with 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 to attract and retain industry talent.
Speak to a Morgan Stanley financial advisor and your legal and tax advisors about your options and what’s best for your business and your team.
Morgan Stanley at Work helps build financial confidence through thoughtful education to help individuals embrace their future, today.