LAST REVIEWED Dec 13 2019 8 MIN READ
By The Human Interest Team
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.
The nuts and bolts of the New York State Secure Choice Savings Program
The New York Secure Choice Savings Program helps more businesses offer state-supervised Roth IRAs. Originally passed in 2018, New York’s $168 billion fiscal budget for 2019 added a provision for this new, voluntary option to help more New Yorkers save for retirement using a Roth Individual Retirement Account (IRA). Modeled after the state’s 529 college savings plan and designed for those who work at small businesses as well as freelancers and contractors.
In May 2021, New York State Assembly passed a bill that aimed to strengthen the New York Secure Choice Savings Program. Rather than provide a voluntary option, the proposal would require private-sector companies with at least 10 employees to provide an auto-enroll IRA program. In turn, this would automatically enroll most private-sector employees into the Secure Choice Savings Program, unless they choose to opt-out.
Impact of New York City’s auto-enroll IRA legislation
Also in May 2021, New York City Council signed a bill into law that will eventually require employers not offering a workplace retirement plan to automatically enroll workers in an IRA. The bill affects most private sector employers with five or more employees. City-provided plans will default to a Roth IRA with contribution rates of 5% and options to change rates up to annual maximums of $6,000 ($7,000 if age 50 or older). Participants may also choose a regular IRA.
While the statute officially goes into effect on August 9, 2021, the newly formed retirement board (consisting of three mayoral appointees and the comptroller of New York City) has up to two years to activate the program. New York City joins Seattle, Washington, and a growing number of states who have approved similar auto-IRA programs. And like other state-sponsored retirement programs, employers may adopt their own qualified retirement plans to comply.
Here’s what employers should know about the New York Secure Choice Savings Program
Presently, the plan entails the following, including the pros and cons of the program:
Is New York Secure Choice mandatory?
For now, this program is voluntary for both businesses and employees. However, New York State Assembly passed a bill in May 2021 that would make the state program mandatory for employers (which would follow in New York City’s footsteps).
How much can employers save?
The new plan simplifies the savings process via a payroll deduction. 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).
How much does the plan cost employers and 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.
In terms of an employer match, small business owners won’t – and can’t – match employee contributions.
How much does a 401(k) cost employers?
Use this calculator to find out how much a plan actually costs.
What are the responsibilities of the employer vs. the state?
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 a small business already offers 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 or 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. Savings are portable and can be transferred if an employee takes a position with another company.
What about freelance or contract staff?
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 these changes go into effect?
On the state level, the proposal that would make the state program mandatory for employers was passed by the New York State Assembly in May 2021. From there, the bill was sent to the New York State Senate for approval. Additional details regarding changes in legislation will be available in the future.
New York City’s auto-enroll IRA program officially goes into effect on August 9, 2021. However, the retirement board has up to two years to get the program up and running.
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 NY the only state with a state-sponsored retirement program??
New York is not alone in its efforts to boost retirement programs for workers. More than ten states have passed legislation authorizing state-sponsored retirement programs, while another 20 states and cities have introduced legislation.
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).
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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.
The Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.