From this year, the state of colorado will require companies with more than five people to offer a retirement savings plan to their employees. We’re fans of any program designed to encourage people to save more for retirement, but anecdotally, business owner readiness seems low due to a lack of communication about the new program.
The WE the outlook for retirement savings is bleak. Retirement savings are ‘dangerously low’ with a projected deficit of $6.8 to $14 trillionaccording to National Institute on Retirement Security. The same organization estimates that two-thirds of working households have retirement savings that are less than their annual income.
In Colorado, approximately 940,000 workers do not have access to a retirement savings plan through their employer. And while several savings vehicles exist for individuals, the traditional 401k plan continues to be the prevailing method. This is especially true if an employer automatically selects employees into the plan, which minimizes the effort an employee must make to participate. This makes savings “automatic”, and automated savings generally yield better results according to the book “Nudge” by Richard Thalier. If employers don’t automatically authorize employees, or even worse, don’t even offer their employees a plan, it often contributes to a lack of savings.
That’s what Colorado’s Secure Savings Act of 2019 was intended to address. From this year, all Colorado employer of five or more employees will be required by law to offer a retirement savings plan. Additionally, it created a state-sponsored pension plan as a default option for employers who do not wish to create or administer their own plan. Failure to offer a plan to employees will be met with escalating fines imposed by the state.
Although this is great news for from colorado workers and their financial future, business owners and employers need to know their options for complying with the new rules and the penalties for inadequate preparation. Unfortunately, communication from the state has been inconsistent at best, which means many business owners will be surprised when they see the first notice hitting the mailboxes. They will need to visit the Colorado Secure Savings website to certify that a retirement plan is in place for their employees. Failure to do so may result in fines of up to $5,000 annually.
As well intentioned as the state is, the details leave much to be desired. The plan offers few investment options to participants and requires calling a generic state-run telephone bank for questions and assistance with the plans. Combined with the need to link payroll records, this could become a real headache for those opting for the “default” option.
Instead, I think many companies will be better served by having a personalized plan in place that meets the needs and wants of their employees. Bolstered by cost-sharing techniques and other savings-oriented laws of recent years, these once-expensive plans are now much more affordable, easier to administer, and often offer tax advantages and increased savings opportunities for business owners. For example, the SECURE law passed at the federal level offers as much as a $5,000 tax credit for up to three years for the creation of a new pension plan.
As retirement plans become more mainstream (hopefully!), a well-structured retirement plan can help attract, retain and reward talented people. Starting one may seem like a daunting task, but start with a few simple questions and considerations:
How much will employees want to save in the plan on an annual basis?
Would they like the ability to choose between pre-tax and Roth contributions?
Will the company match its contributions?
Are there tax credits for implementing a plan?
What investment options do employees want in a plan?
Would employees appreciate having access to financial education, accredited financial professionals and planning tools through the pension plan?
Business owners should also ask themselves how much they would personally like to help build their own financial future. The state-sponsored retirement account is subject to certain income and contribution limits that may actually prevent owners and other highly paid employees from contributing.
If it wasn’t obvious, we’re big proponents of saving until it hurts. But as humans, we’re not good at saving money, especially as the cost of everything around us continues to rise. Government efforts to close the retirement savings gap are welcomed and encouraged, even if investment options are lacking and implementation poorly communicated. While this may be a burden for business owners and “another thing to do”, I believe it will prove useful years later for Coloradons who currently do not have a retirement savings plan. at work.
Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of “Intelligent Investing: Your Guide to a Growing Retirement Income”. He was named by Forbes as the 2021 State’s Top Wealth Advisor and 2021 Barron’s Top Advisor by State. This column is not intended to provide specific investment advice or recommendations.
