Over the last 10 years many state governments across America have been looking for ways to help their residents get to and through retirement. Studies have shown that people without access to a workplace retirement savings plan are at a disadvantage and often must work longer or face a more limited quality of life during retirement. This term is often referred to as the ‘coverage gap’ and is a nut that federal legislation is still trying to crack.
To quell this problem states have been creating their own retirement systems starting in 2017 with Oregon’s retirement program OregonSaves. Since these programs are mandated at the state level, they are all slightly unique. For example, CalSavers requires all contributions to be made via Roth, while Maryland$aves requires the first $1,000 of contributions to be made towards an emergency fund. These differing rules can cause confusion among employees and employers. While we are strong supporters of getting as many employees involved as early as possible in their workplace retirement plan, we think private options can provide better outcomes. Kampstra Wealth Management prides itself in being educators first and we like to explain the pros and cons of each state run program vs. private sector alternatives.
For example, almost all the state run programs only allow for employee contributions (no employer contributions). While getting employees to save their own money for retirement shouldn’t be taken lightly, adding employer contributions to the mix can provide significant benefits to the employees’ retirement savings. SIMPLE IRA, SEP IRA, and 401(k) plans on the other hand allow for employer contributions, which can often be tilted in favor of the business owner. Most importantly, employer contributions to a retirement plan are a tax-deductible business expense. So, by helping its employees save for retirement, the business consequently also saves on taxes. Beyond tax deductions at the employer level, 401(k) plans allow employees to choose whether to make pre-tax or Roth contributions. This allows employees to have more customization and control over the taxation of their accounts and can add significant value when planning for retirement.
Another area where private retirement plan options often trump the state-run programs is in regard to investment options. Within a 401(k), or even a SIMPLE IRA plan, employees almost always have the option to choose between multiple stock funds, bond funds, a Target Date Fund lineup, risk-based funds, and a cash fund. However, with many state-run programs, like Maryland$aves, employees will only have 4 investment options; a Target Date Fund, a cash fund, a stock fund and a bond fund. The flexibility and personalization that private sector plans can provide give the employee a chance to reach an outcome more tailored to his or her needs.
Arguably the biggest argument in favor of selecting a 401(k) over the state run retirement option is that it offers ERISA protection. ERISA, short for Employee Retirement Income Security Act of 1974, is a law that created protections for employees within many workplace retirement plans. One of these key protections is that your retirement assets are secure from all entities or creditors except your spouse in the event of a divorce, or the IRS. Having your wealth protected by ERISA should allow employees in 401(k) plans to rest easy at night.
Working with a retirement plan specialist can help you wade through your retirement options and create the best solution for you and your employees for years to come. Contact Kampstra Wealth Management today at info@kampsrta-wm.com or 717-334-0097 to see what workplace plan would be the right fit for your staff.