LAST REVIEWED Dec 13 2019 12 MIN READ
By The Human Interest Team
The New Jersey Secure Choice Savings Program is slated to launch in March 2022.
It will be mandatory for businesses with 25+ NJ employees without a current employee retirement plan.
Will the auto-IRA be your best choice? Learn how a 401(k) plan may outperform the state-provided option.
Approximately one million full-time employees in New Jersey don't have access to an employer-sponsored retirement plan, according to the American Retirement Association. To help make retirement planning more convenient for both employers and employees, New Jersey Governor Phil Murphy signed the New Jersey Secure Choice Savings Program Act (A4134) into law in March 2019.
The state-run retirement option requires businesses with 25 or more employees that do not provide a qualified retirement plan such as a 401(k) to offer an automatic payroll deduction for employees, which will be paid into an IRA. The Garden State joins a growing list of states that have introduced a state-mandated retirement program.
Is the Secure Choice Savings Program the best option for New Jersey employers? Below, we review the top ten things everyone should know about this upcoming program—and compare it against other options like 401(k) plans.
When does the NJ Secure Choice Savings Program launch?
The New Jersey Secure Choice Savings Program—also called the NJ Auto-IRA Law—is set to launch in March 2022. Once the program is up and running, employers must comply within nine months or be subject to penalties
While the initial implementation date was March 28, 2021, the program was allowed up to one year extension due to COVID-19. Accordingly, March 28, 2022 will be the deadline to establish guidelines for businesses, create a website with up-to-date information, govern risk management, determine investment options, and implement the program.
Is the NJ retirement program mandatory or voluntary?
The New Jersey Secure Choice Savings Program Act is mandatory for businesses (for-profits and nonprofits) that have 25 or more employees in New Jersey without a current employee retirement plan, such as a 401(k) or 403(b). Employers with fewer than 25 employees may participate in the program, but will not be required to. While specifications are not yet established, it’s suggested that the program will affect employers who have been in business for at least two years.
Are there penalties for companies that fail to comply?
Yes. Once the act takes effect, businesses will have nine months to comply with the automatic payroll deductions or face penalties from the state Treasury Department.
Penalties range from a warning to a $500-per-employee fine, according to section 19 of the bill. If business owners are concerned about the fees or other costs of compliance, they can elect to offer another qualified retirement savings option for employees, such as a 403(b) or 401(k). Employers will report their compliance with the Act via the business’ state income tax returns.
How will the Secure Choice Savings Program work?
The program will be managed by the New Jersey Secure Choice Savings Board, which includes the office of the state treasurer, comptroller, and office management and budget, as well as two public representatives, and one representative from a business trade organization and one on behalf of enrollees. The plan will be audited annually and a report will be made available to the public.
What do employers have to do to comply?
The state New Jersey Secure Choice Savings Board will provide more specifics, but at this time, employers who participate will be required to:
Distribute an information packet on the program, prepared by the Board
Set up payroll infrastructure to accommodate automatic enrollment
Deposit employee payroll deductions into the program fund
Offer an annual Open Enrollment period and
Enroll any new employee no later than three months after their hire date
What will the new plan cost?
The plan comes with no long-term costs to the taxpayers or to employers, since program management fees will be paid by participating employees. In the short-term, the State will cover the costs of launching the plan (and later be reimbursed by fees that come from the plan). The legislation also stipulates a ceiling for fees that are charged to participating employees. Plan management fees cannot exceed 0.75% in the plan’s first three years and 0.6% thereafter. The Act focuses on keeping retirement planning costs low and benefits high.
How are investments chosen and managed?
Plans will be invested and managed by a yet-to-be-announced private investment firm. While funds have not been determined, according to section 11 of the bill, the board may establish a target-date fund based on the age of the enrollee as the default investment for those who do not elect another option. The board may establish any or all of the following investment options:
Conservative principal protection fund
A growth fund
A secure fund whose primary objective is the preservation of the safety of principal and the provision of a stable and low-risk rate of return
An annuity fund
A capital preservation fund that prioritizes the security of the deposit over the rate of return
A life-cycle fund or any other investment option deemed appropriate by the board
The board is expected to not offer more than five investment options in any given calendar year.
Who can contribute: employees, employers, or both?
Only employees can contribute to the new retirement accounts; there is no mandate for an employer contribution or match. Employee contributions will be automatically deducted from their payroll and put into an IRA. A standard 3% payroll deduction will be moved, unless the employee chooses to opt out or to elect a higher or lower percentage.
In accordance with IRS rules, there’s a cap to what employees can contribute to an IRA. In 2019, 2020, and 2021 the max contribution to an IRA is $6,000 (or $7,000 for those age 50 and over).
What happens if an employee changes jobs?
IRAs are portable, so workers can move them if they switch jobs. New employees must be enrolled within three months of their hire date. If they decline initial participation, they can wait until an open enrollment period.
What are the pros and cons of New Jersey’s Secure Choice Savings?
The bill has received both support and criticism. Let’s review.
For employees: While intended to address the retirement savings gap by providing more coverage, the bill has drawbacks. Compared to other options like 401(k) plans, IRAs have limited flexibility (i.e. no employer matching, a default 3% payroll deduction, and a lower contribution limit).
For employers: Offering employees retirement plan options can lead to improved recruiting, decreased turnover, and tax savings. Employers aren’t responsible for investment returns, program design, or program benefits—but will have to set up infrastructure and establish processes for employee payroll deductions, ensure they’re compliant with the plan rules, and move employee funds into the state fund.
What should you do now?
Employees should talk to their employer about their plans. Interested in asking your boss or manager for a 401(k)? Our guide can help you ask your boss or manager for a 401(k) for your company.
New Jersey businesses should consider whether they want to offer the program, or if another qualified retirement plan would better suit their needs. Those adding retirement planning options and services for workers should be ready to communicate with employees and to launch the savings program in early 2022. It’s also important to keep an eye on any updates to the bill.
For now, Human Interest will be sure to be your eyes on the ground. Considering a retirement plan for your employees but not sure where to start? We can 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.