Why are States Beginning to Mandate Small Business Retirement Plans?

Image: Why are States Beginning to Mandate Small Business Retirement Plans?

For many people, reaching a financially secure retirement may seem more like an unrealistic daydream than a future reality. Too few people are adequately saving for their retirement, too many are relying on Social Security to fund their golden years, and too often, employees don't have a savings plan available through their employer to help. If we continue down this path, the future (and the economy) may look drastically different than what we envision today.

As a result, state governments are stepping in. To help today’s workforce more adequately prepare for a financially secure future, state governments across the country have started outlining legislation that requires all types of employers to offer some type of retirement plan for their employees to save in. In the last ten years, over half of the states have introduced legislation at the state level to implement or study options for state-sponsored retirement savings plans—but is this really necessary?

Why retirement state mandates are necessary

A declining number of Americans are confident in their ability to live comfortably throughout retirement—and among those who don't feel confident, 40 percent say their lack of confidence is due to having little to no savings.1 Pair that with the fact that people have the potential to live longer today than in the past, and it’s easy to see why so few people are confident they can fund their entire retirement.

Adding to the problem is that once-reliable defined benefit plans (such as pensions) became increasingly rare for employers to offer, meaning the burden of obtaining a financially-secure retirement is falling on employees—rather than their employer—now more than ever before. As we've seen, insufficient savings—coupled with subpar economic growth, rising household debt, and an increasing cost of living—have all contributed to preventing today’s workers from achieving the retirement they always envisioned.

Employees clearly need a little bit of help from their employers to reach maximum retirement readiness, but reality is, the current retirement landscape doesn’t exactly have a level playing field. In reality, there are large discrepancies between employees who have access to a retirement savings plan based on their employer’s size, industry, their own education level, and the like. The state-run retirement programs require all employers—regardless of size—to offer some type of savings plan to employees, allowing workers who would otherwise not have access to a plan to begin putting away money.

Furthermore, and perhaps most importantly, states aren't just worried about the current climate in the retirement industry and among their citizenry—they’re thinking years into the future. Employees who aren’t saving enough for retirement right now and plan to live off Social Security in the future are setting themselves up to need support as they age. When a large number of people retire and don’t have adequate savings to cover things like healthcare, housing costs, and other everyday essentials, it’s the state government that ends up paying more money—both earlier and longer—than the federal government.

The root of the problem is this: people aren't as likely to save for retirement if they don’t have an easy, readymade option to do so. More than 30 percent of employees in the private sector are not offered access to a retirement savings plan through their employer.2 How can we set today’s workforce up for a successful future when so many workers don’t even have access to a savings program? How can we realistically expect workers to own their retirement readiness if we don’t give them a way to do so?

Cue the state mandates.

How does a state mandated retirement plan help employees save more?

As we mentioned earlier, the state mandates were designed to level the retirement plan access playing field, so to speak, by providing all employees with a plan to save in, regardless of sector, company size, employee education level, etc.

To put it simply, many Americans aren’t actively engaged in saving for their future—let alone their retirement. Why would they think about something so far off in the distant future, when student loans, housing costs, and bills are piling up today?

Providing access to an employer-sponsored plan may be just the kick workers need to get in gear and begin properly preparing for their future. In fact, 88 percent of employees who are offered a 401(k) or similar plan through their employer are saving for their retirement—but in stark contrast, less than half of workers who don’t have access to an employer-sponsored plan are saving for retirement.3

The necessity seems obvious.

How state mandates could affect small business owners

The mandates will help today's workers prepare for a more secure retirement in the future, but how will the business owners, who are now being mandated to offer a retirement plan to employees, be affected? Cost may be an initial concern for some—but in reality, the mandates aren't going to take funds out of small business owners’ pockets since the plan will be state-funded and state-run.

Additionally, the state mandates will allow business owners to save for their own retirement—which may not have been an option before if no plan was offered through the business and the owner never opened an Individual Retirement Account (IRA) for themselves.

Types of state-sponsored retirement programs

While the goals of the state mandated retirement programs all center around helping workers reach retirement readiness and future financial independence, the specifics of the mandates themselves vary by state. The local state governments were tasked with maximizing effectiveness to safeguard our collective future as a society, while minimizing cost and financial risk to the employers the mandates are required for. To help accomplish this, state legislations have outlined four retirement program models.

  • Mandatory auto-IRA programs
  • Voluntary retirement plan marketplace
  • Voluntary state-based open multiple employer plans (MEPs)
  • Voluntary payroll deduction IRA programs

Click on the map below to learn more about the program details and guidelines for each state's mandated retirement program.

It's important for employers to note that while these four program models would satisfy the mandate within their specific state, there are additional options that would do so as well.

What options do business owners have to satisfy retirement state mandates?

Business owners have a variety of options to satisfy the retirement mandate in their state; they can choose the state-sponsored program or decide to offer a different type of qualified plan instead—like a 401(k) or a pooled employer plan (PEP).

Ascensus offers a variety of retirement plan options that satisfy state mandate regulations and are designed with business owners and their financial advisors in mind.

To learn more, contact our retirement specialists today at 800-345-6363.



1"2023 Retirement Confidence Survey." Accessed June 28, 2023. https://www.ebri.org/docs/default-source/rcs/2023-rcs/2023-rcs-short-report.pdf?sfvrsn=7c8d392f_6.

2"Retirement plans for workers in private industry and state and local government in 2022." Accessed June 29, 2023. https://www.bls.gov/opub/ted/2023/retirement-plans-for-workers-in-private-industry-and-state-and-local-government-in-2022.htm.

3"Post-Pandemic Realities: The Retirement Outlook of the Multigenerational Workforce." Accessed July 11, 2023. https://transamericainstitute.org/docs/default-source/research/post-pandemic-retirement-realities-multigenerational-workforce-report-july-2023.pdf