In an attempt to address the country’s retirement savings crisis, several states have now started requiring certain employers to offer a retirement savings option. If employers are unable to provide a private retirement plan, they must adopt their state-mandated plan. These government-initiated programs aim to boost retirement savings through automatic enrollment in Individual Retirement Accounts (IRAs), with payroll deductions unless employees opt out. While these state plans might seem like a great idea and might be a good option for employees, they’re not necessarily the best option for employees or employers.  It’s important to always weigh the pros and cons.

Here are some of the pros of a state mandated plan:

• Encourages savings and financial security.
• Provides access to retirement plans for workers without employer-sponsored options.
• Accounts are portable, remaining with employees if they change jobs.
• Simplifies compliance with state laws for employers.
• Enhances employee satisfaction and retention.

However, it’s important to look at the downside of these plans as well.

• Limited investment options compared to private retirement plans.
• Lower participant contribution limits than traditional 401(k) plans.
• Participants’ savings are not maximized as employer contributions are not allowed.
• Noncompliance can result in fines and penalties.
• Employer contributions are not allowed, leaving no tax advantages to the employer.

Why Traditional 401(k) Plans are a Better Alternative

While state-mandated plans provide a basic retirement savings option, traditional 401(k) plans offer several advantages that make them a superior choice for both employers and employees. Here’s why:

• 401(k) plans typically offer a wider range of investment choices, allowing employees to diversify their portfolios and maximize long-term growth potential.
• Unlike state-mandated IRAs, 401(k) plans allow (and often encourage) employer matching contributions, which can significantly boost employees’ retirement savings.
• 401(k) plans have much higher annual contribution limits compared to state-mandated IRAs, enabling employees to save more for retirement each year.
• Employers can benefit from tax deductions for contributions made to employees’ 401(k) accounts, while employees may receive tax advantages on their savings.
• Offering a robust retirement plan can improve employee satisfaction and retention, making a company more competitive in attracting and keeping top talent.

State-mandated retirement plans enhance retirement savings accessibility, but traditional 401(k) plans offer better investment options, higher savings potential, and greater benefits for both employees and employers. Businesses should assess their needs and consider offering a 401(k) plan for a more comprehensive retirement solution.