State-Mandated Retirement Plans: An Overview for Small Businesses 

Retiring comfortably is a cornerstone of financial security for many Americans, yet achieving this goal is increasingly out of reach for many. According to a recent survey by Bankrate, 57% of Americans who are employed full-time, part-time, or temporarily unemployed feel behind on their retirement savings. Among those with specific retirement goals, nearly half (48%) doubt they will ever save enough to meet them.¹ Rising inflation, high interest rates, and economic uncertainties are forcing many workers to prioritize daily expenses over long-term savings, creating a financial shortfall that could jeopardize their ability to retire in the future. 

In response to this growing crisis, states including New York are stepping in to address the retirement savings gap by requiring small businesses to offer retirement plan options to their employees. These state-mandated retirement programs are designed to make it easier for workers to save for their golden years while helping employers meet the rising demand for employee benefits. 

State-mandated retirement programs require employers to provide retirement savings options if they do not already offer them. The programs often include features like automatic enrollment in individual retirement accounts (IRAs) for employees, with contributions deducted directly from their paychecks. Employers typically do not have to match contributions or manage the accounts, as the state oversees program administration. 

What does this mean for small businesses? 

Small businesses are often exempt from offering retirement plans due to cost or administrative challenges, but state mandates are changing that. In states like New York, small businesses with a minimum number of employees (typically five or more) must either enroll workers in the state’s retirement program or set up their own qualified retirement plan, such as a 401(k). 

Failing to comply can result in penalties, making it essential for small business owners to understand their obligations. While this might seem like an added burden, these programs also present an opportunity. By offering retirement benefits, small businesses can attract and retain top talent, especially as more workers prioritize long-term financial security. 

Which states are impacted? 

More than 25 states have proposed state-mandated retirement plan legislation, and 10 have active state-sponsored retirement plans. View your state’s mandates here. 

Source: www.adp.com/resources/state-mandated-retirement-plans.aspx

Why state-mandated plans are critical 

As Americans struggle to save, relying on public assistance programs during retirement could grow, straining government resources. State-mandated retirement plans address this issue proactively by encouraging personal savings. 

For workers, these plans provide a simple, low-barrier way to save for the future, with automatic payroll deductions, helping them build a significant nest egg without requiring significant upfront decisions. For employers, compliance with these programs demonstrates a commitment to employee well-being, helping to foster loyalty and satisfaction. 

How employers can prepare 

If your business operates in a state with a mandated program, consider these steps to ensure compliance: 

1. Understand your state’s requirements. Each state has its own rules regarding employer eligibility, program specifics, and deadlines. Familiarize yourself with the requirements in your state and plan accordingly. 
2. Evaluate your options. Decide whether to enroll in your state’s program or establish a private retirement plan like a 401(k). While state programs are straightforward and low-cost, private plans can offer more flexibility and higher contribution limits. 
3. Communicate with employees. Educate your employees about the program and how it benefits them. Clear communication helps ensure a smooth transition and demonstrates your commitment to your employees’ financial health. 

If you have questions about the new mandates – or want to help ensure your business stays compliant – contact your advisor. If you are not a client and would like to learn more, let’s talk.   

¹ Gillespie, Lane. “Survey: More than Half of American Workers Feel Behind on Their Retirement Savings.” Bankrate, 25 September 2024.