State-Mandated Retirement Plans: Where Does Your Business Stand?

mature female business owner looks at laptop computer

By Christopher Magno, SVP/General Manager, ADP Retirement Services

It's been a few years since state-mandated retirement plan legislation first appeared in the headlines. Whether you've already implemented a new plan, or are still in the decision phase, read on to find out where other small businesses stand — and what options are available to you.

Every employee deserves the opportunity to enjoy a comfortable, secure retirement. Over the last few years, state-mandated retirement plans have been rolling out across the United States to make it easier for small businesses to offer employees the chance to save.

But are small businesses required to offer a retirement savings plan? That depends on where you conduct business.

More than 30 states have considered enacting state retirement plan legislation. So far, 18 states have actually signed such programs into law. As of June 2023, nine states have mandated retirement plans already in the pilot phase or further along, yet places like Vermont and New Jersey still have no scheduled start dates.

Overall, the number of small businesses that offer retirement plan benefits is still fairly low. That's largely why the government has gotten involved. But remember, if you're an employer affected by the mandate, you have a choice as to which type of plan to offer. You can still set up a retirement plan from a non-government provider, like establishing your own employer-sponsored plan —as long as it meets your state requirements.

State-mandated retirement plan vs. employer-sponsored retirement plan

When required to choose a retirement savings plan, a thorough evaluation process can help ensure that the plan type best meets your company's goals. Here's a quick recap:

Compared to a state retirement plan, a company-sponsored plan offers more options for all. A 401(k), for example, allows for pre-tax deductions, saving you and your employees money by reducing your payroll taxes and their taxable income. But is a 401(k) mandatory? What about a SIMPLE IRA? Nope and nope. State plans, for example, are commonly Roth IRAs, which allow participants to set aside after-tax income up to a specified amount each year. Employee contributions are deducted from post-tax income, so they're generally tax-free at the time of withdrawal after age 59½.

There's also a level of customization to consider. An employer-sponsored plan allows you to choose from a range of investment options at various levels of risk and savings potential, giving employees more control over their investment decisions. State-sponsored plans don't typically offer this flexibility, as a state-selected board chooses a firm to make investment decisions.

And when it comes to plan maintenance, state retirement plans automatically enroll workers as they become eligible. For employers, this can be a low-cost solution with fewer fiduciary responsibilities. A company-sponsored plan may also offer auto-enrollment, plus additional benefits like financial wellness tools and personalized participant communications.

Do employers need to provide employees with a retirement plan?

Whether it's mandated or not, offering a retirement plan can help make saving for retirement easier and more accessible for everyone. It's also a great benefit to help you stand out in today's hiring market.

Give your company a competitive edge while setting your employees up for a better financial future. For guidance in choosing the right plan, connect with an ADP retirement specialist or call 1-800-432-401K.

ADP's SECURE hub brings together useful resources to keep you on track and your retirement plan compliant.

ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.