Providing employee benefits is often a struggle for small business owners, but a couple of states are leading the way with an innovative solution.
Illinois was the first state to create what is being called a small business retirement marketplace, similar in format to health insurance marketplaces. In May 2015, the state of Washington launched a similar plan.
With the Baby Boomer generation nearing retirement, state leaders realized that many residents weren’t enrolled in retirement plans beyond Social Security. In Illinois, that number was estimated to be 2.5 million people. They also found that 60 percent of low-wage workers didn’t have access to a plan. Even for those making more than $40,000 a year, only 49 percent had a plan available.
Illinois’s plan is mandatory after June 1, 2017, for businesses that have been operating for over two years, have 25 employees or more and don’t presently offer a retirement plan. Employees will be automatically enrolled, with a minimum contribution of 3 percent of wages or salaries. Contributions can be adjusted, and employees can opt out. Several investment options will be offered.
The situation in Washington was comparable to Illinois, with 2013 AARP research showing that almost a half million residents between 45 and 64 years of age had less than $25,000 in savings. In addition, over 1.5 million Washington workers didn’t have access to retirement plans in the state – three-quarters of small employers don’t provide them. Washington’s program targets employers with 100 employees and under.
Participation in the Washington Small Business Retirement Marketplace is voluntary. There will be no cost for businesses to enroll, and fees for employees are capped at 1 percent.
Employers can choose to contribute an employee match, but they aren’t required to. The plans will belong to the employees, so if a new employer offers the program, they can roll it over at that workplace. They can also roll over their savings into another pension program or IRA account if the new employer doesn’t participate.
Another important aspect of the plan is lack of liability for the state. State employees can’t participate, so the program isn’t tied into state pension funds with an associated requirement that taxpayers provide funds. The state will also not be responsible for the performance of the pension funds but will publish independent reports about performance to help employees make the right choice.
Also slated to begin in 2017, the state’s next step is to identify financial services companies who want to belong to the Washington marketplace. Companies must sign contracts agreeing to certain provisions, including fees. The selected retirement plans and options will be listed on a website so employers can compare plans and choose the one that is right for them and their employees.
The participating firms will work directly with employees and manage their accounts. They will also assist employers in completing paperwork and the required reporting .
Small business owners in Connecticut are interested in a similar plan, according to a recent AARP survey. Other states are sure to follow. Since the cost to states is minimal and the programs boost savings for those approaching retirement age, marketplace programs appear to be an idea whose time has come.
Financial services firms gain additional enrollment, small businesses can provide a low-cost benefit to their employees, and workers benefit from a portable, easy-to-use retirement program.