We’re all too aware of the looming retirement crisis. Almost 28% of non-retired adult Americans have no retirement savings or pension and finances continue to be the number one cause of stress in this country. In response, a number of states, including New Jersey, have decided to take matters into their own hands by enacting legislation that requires most employers to offer employees access to a payroll deducted retirement program. So, what does this mean for your business?
While the New Jersey Secure Choice Savings Program Act was signed into law in 2019 with an anticipated start date of March 28, 2021, that can be delayed for up to 12 months. That said, New Jersey business owners will soon have to begin offering a retirement plan to employees. This mandate applies to both for-profit and nonprofit companies that have been in business for at least two years and have 25 or more employees, including leased employees – workers employed by a professional employer organization, but who perform all their work at your company. Once the plan is up and running, business owners will have nine months to comply or face annual penalties starting at $100 per employee and gradually increasing to $500 per employee each year. There are additional penalties for failing to remit any portion of the employee’s contribution to the fund.
As with most states, New Jersey gives workers the option to invest in a state-administered payroll-deducted Individual Retirement Account, the New Jersey Secure Choice Savings Program, or set up their own company-sponsored retirement plan. Companies that do not meet the mandated requirements are still eligible to participate in the program, but it is purely voluntary.
Offerings like the New Jersey Secure Choice Savings Program tend to be low-cost and use investments selected by the state. Under the New Jersey Program, employees will be automatically enrolled with a pre-tax contribution rate of 3% unless the employee opts out or changes their contribution rate. So while the state plan can make it easy for employers to get started, there are also significant benefits to creating a customized company-sponsored plan that works for you and your employees.
In fact, there are many perks to offering your own retirement plan such as tax incentives, recruitment and retention benefits, plan and fund flexibility and maximizing investments in your own future. And thanks to new entrants and advanced technology, many traditional inefficiencies have been eliminated, keeping costs down and administration simple.
There are clear differences when offering your own plan, as it gives you the ability to:
Select your own investments to include the right fund variety and offer user-friendly models like target-date funds and managed accounts.
Create your own plan design so you have more control over things like company matching and eligibility rules.
Derive significantly greater tax benefits – a 401(k) plan allows deductions of pre-tax earnings of up to $19,500 per year in 2021 whereas an IRA only permits deductions of up to $6,000 per year in earnings.
Borrow against your plan in times of emergency.
Keep costs equally low thanks to new entrants and advanced technology that eliminates overhead.
So while state-sponsored plans are getting the conversation started, it’s important to look at your bigger picture strategy and determine the best short-and long-term decisions to support the needs of your company. At the end of the day, offering any type of retirement savings plan for your employees is a good thing. It’s up to you to decide how.
Allison Brecher, general counsel with Vestwell, has over 15 years of legal and regulatory experience, handling high profile and complex litigation involving employee benefits, ERISA, regulatory matters, data privacy and electronic discovery.