IRA Retirement Savings in New York: New Legislation and the Impact on Small Business Owners
It’s not headline news that many Americans are struggling to save enough for retirement. However, a recent report from Certified Financial Planner Board reveals that half of adults are not saving for retirement.
When you combine the fact that fewer companies today provide pension plans to employees with those same workers living longer and needing to save more, the gap between work and retirement can seem like a chasm. In New York, about 4.3 million private-sector employees work for businesses that do not have 401(k) plans, pensions, or other retirement savings options, according to the New School for Social Research in New York.
To address the retirement savings gap, some state governments are focusing on new efforts to bolster retirement options and savings by establishing retirement programs for private sector workers whose employers do not offer a 401(k) or other retirement plan. Passed in 2018, New York’s $168 billion fiscal budget for 2019 added a provision for the New York Secure Choice Savings Program, a new, voluntary option to help more New Yorkers save for retirement using a Roth Individual Retirement Account (IRA).
The nuts and bolts of the New York Secure Choice Savings Program
Modeled after the state’s 529 college savings plan and designed for those who work at small businesses as well as freelancers and contractors, the New York Secure Choice Savings Program helps more businesses offer state-supervised Roth IRAs for employees as well as freelancers and contractors.
While many details remain undecided, a 10-person board will determine the program’s overall structure, contribution limits, communications, and outreach while overseeing the New York Secure Choice Program.
Here’s what you need to know
Presently, the plan entails the following, including the pros and cons of the program:
- Is the program mandatory? Unlike some previous bills that did not pass, this program is voluntary for both businesses and employees. Across the border in New Jersey, the plan is mandatory for designated businesses.
- How much can you save? The new plan simplifies the savings process via a payroll reduction; employees can save up to the annual Roth IRA limits, which are $6,000 for those under 50 and $7,000 for workers 50 and older in 2019. Roth IRAs allow retirement savings to grow tax-free and withdrawals made after retirement are generally not taxed (since contributions are taxed on the way in).
- Is there an employer match? Small business owners won’t – and can’t – match employee contributions.
- How much does the plan cost employers? Employees? The only costs employers will face are administrative set-up fees, making this an affordable option for businesses and employees compared to plans offered by traditional retirement plan providers. Further, the Secure Choice legislation includes a one-time investment of $4 million to cover administrative costs, which is expected to be recouped by the program within a few years.
- What are the responsibilities for the employer? The state program? Small businesses that participate in the Secure Choice program will not be considered fiduciaries, which means employer involvement will be limited. The state will administer the program and determine investment options, which may include a conservative principal protection fund, a growth fund, a secure return fund, and an annuity fund.
- What if I already offer my employees a retirement savings program? If your small business already offers a 401(k) or pension plan, then you will not use the New York Secure Choice Savings Program. Businesses retain the option to choose retirement programs of their choice for employees.
- Are employees automatically enrolled? Can they opt out? When a small business chooses to participate in the plan, employees are automatically enrolled, unless they designate that they will opt out.
- What if I change jobs? Savings are portable and can be transferred if an employee takes a position with another company.
- What about my freelance or contract staff? At this point, program details suggest that freelancers and contractors will be able to take advantage of a retirement benefit marketplace to be created by the board.
- When will all of this go into effect? The program is expected to take effect April 2020, but more details on enrollment in the New York Secure Choice Savings Program (and other aspects of the program) will be available at a later date.
Simplifying the savings process for all
While the New York Secure Choice Savings Program is voluntary for both small businesses and workers, AARP research indicates that it will likely be popular: 74 percent of New York-based businesses without employee retirement plans were in support of such a privately managed state retirement savings option and Americans are 15 times more likely to save when they can do so through work. Further, the savings program was widely supported by the AARP, the legislature, and local business and employee groups.
Is this just in NY?
New York is not alone in its efforts to boost retirement programs for workers: Since 2012, more than 40 states have either implemented or studied legislation related to new government retirement programs. Created to make it easier for small businesses to offer retirement plans and for employees to benefit from them, the New York Secure Choice Savings Program legislation is expected to expand employee retirement savings statewide since 91% of employees will choose to save for retirement when they have the option of an automatic payroll deduction, according to client data from Vanguard (versus just 60% for plans that offer voluntary enrollment).
Employers have options
Rather than Secure Choice, an employer could offer another type of retirement savings plan to their employees instead. Want to learn more about low-cost, retirement savings plans designed to match the needs of small and medium-sized businesses? We’re here to help.
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