For the most part, employer retirement plans are entirely voluntary. Your employer may choose to offer a 401(k) or something similar, and they may choose to match contributions, at their discretion. However, some states have begun to require more than that. With state-mandated retirement plans, an employer is required to offer its workers access to a state-based plan. The details vary from state to state. But in most cases, the state requires the employer to offer a Roth-style IRA and potentially to auto-enroll all employees. Here’s how it works.
A financial advisor can help you create a financial plan for your retirement needs and goals.
What Is a State-Mandated Retirement Plan?
A state-mandated retirement plan, otherwise known as a state-sponsored retirement plan, is one in which the state establishes an individual retirement plan (IRA) on behalf of its citizens. The state either runs the plan directly or hands-off management to a third party.
It then requires employers to offer that plan to their workers and often requires that employers auto-enroll workers with the choice to opt out. Any employer above a certain size, which does not already offer its own qualified retirement plan, must offer the state-sponsored plan or pay a penalty.
How Does a State-Mandated Retirement Plan Work?
Since this is a state-based issue, the details differ across jurisdictions. However, most, if not all, states share the same broad structure:
- The state requires employers to offer their employees access to a specific IRA or Roth IRA.
- The plan is established and run by the state, or by third parties chosen by the state.
- Employees are typically auto-enrolled with an option to decline.
- The mandate applies to employers of a certain size or above.
- The mandate does not apply to employers that offer an alternative qualified retirement plan.
- Employers that qualify but do not participate face penalties and fines.
It’s important to note that, despite some narratives to the contrary, employers are not required to run a state-mandated retirement plan. Nor are they required to offer matching contributions. Instead, they are only required to offer or automatically enroll employees in a plan that is established by the state.
Auto-enrollment is a key feature of most, if not all, state-mandated retirement plans. Repeated studies have found that this boosts retirement savings significantly since people are far more likely to participate in a plan when they have the choice to opt-out rather than when they must choose to opt-in.
How Many States Mandate Retirement Plans?
Few states have active retirement mandates. Most states have legislation at some stage that covers a mandated retirement plan. But it’s important to note that this means relatively little. Draft bills and pending legislation don’t always represent significant support, it can mean that as few as one or two members of the state legislature have proposed the idea.
Beyond that, 10 states have mandated retirement plans at some stage of activation. States like Connecticut and New Jersey currently have fully active mandated retirement programs. Others, like Maine and Virginia, have passed laws for mandated retirement programs that are in the process of rolling out.
As of 2022, the following states had passed laws mandating tax-advantaged retirement programs, implemented such programs or scheduled implementation of such programs:
- California
- Colorado
- Connecticut
- Delaware
- Hawaii
- Illinois
- Maine
- Maryland
- Massachusetts
- New Jersey
- New Mexico
- New York
- Oregon
- Vermont
- Virginia
- Washington
Why Do States Require Retirement Plans?
The goal of a state-mandated retirement plan is to boost the amount of retirement savings among Americans.
Retirement savings have long reached a crisis level among American households. That problem will only grow once today’s younger generations reach maturity and old age. Retirement is a big enough problem for the Baby Boomers, a generation that holds roughly two-thirds of the nation’s wealth.
Millennials and Generation Z are in even worse shape, with their household finances drained by multiple recessions and trillions in student debt. Low-income households don’t have the money to save for retirement, while higher-income households spend their 20s and 30s sending checks to the Department of Education.
All of this is compounded by the fact that about one-in-three American workers have no access to an employer-sponsored retirement plan at all. While those households can still open an IRA, the complexity of opening and managing an investment portfolio is daunting.
By requiring employers to offer a professionally managed retirement plan with deductions at the point of a paycheck, state-mandated retirement plans hope to boost retirement savings among households. This cannot solve the liquidity problem that makes it hard for many people to find the money to save for retirement, but it can make the process easier and encourage participation.
Bottom Line
State-mandated retirement plans, which vary by state, are retirement savings programs established by state governments for workers who do not have access to an employer-sponsored retirement plan. These plans can be in the form of a traditional defined benefit pension plan or a defined contribution plan, such as a 401(k) or IRA.
Many states have considered or are considering it, but as 2022 drew to a close 16 states had mandated such plans, implemented such plans or scheduled implementation.
Tips to Help You Figure Out Your Retirement Strategy
- If you want help figuring out what retirement plan or plans are right for you, consider working with a financial advisor. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Having an accurate sense of your cost of living can better help you prepare how much you’re going to need to save for retirement. You can save accordingly now in order to save yourself from trouble later. Use our retirement calculator to get a comprehensive breakdown.
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