- A defined benefit plan follows an older retirement savings model, essentially a traditional pension or cash balance plan. The employer contributes to a retirement fund, which then pays out to the employee on a periodic basis after retirement. In most cases, the employer alone contributes to the plan. In return, the employee must work for the company for a set period of time to qualify for benefits.
- A defined contribution plan, on the other hand, is arranged so the employee contributes a set amount of their paycheck into an account that holds the funds until retirement. Most people know them as a 401(k) or 403(b). In some cases, the business will add matching funds to the account, or even pair the plan with a profit sharing contribution. As with defined benefit plans, there are strict definitions as to when each worker can access funds.
Why Offer a Comprehensive Defined Contribution Plan to Employees?
A defined contribution plan offers considerable benefits, and addresses a number of immediate concerns affecting businesses in every field.
The Labor Shortage Is Real
The Benefits Are Tax Deductible
In Some States, It’s The Law
The state passed the Colorado Secure Savings Program—a publicly funded retirement plan—with state-facilitated automatic enrollment similar to that of California’s. The plan is tentatively scheduled to begin implementation in late 2021 or early 2022.
Connecticut passed Public Act 16-29, intended to provide a program for private-sector workers to utilize a public retirement fund if they don’t have one through their employer, in 2016. The state also established the Connecticut Retirement Security Authority to evaluate and implement this program. As of October 2021, there is no schedule for implementation.
Illinois Secure Choice began implementation in 2018. Like others on this list, this program provides a public option for workers without other retirement choices. Once companies register, an automatic payroll deduction is made from employee salaries into a Roth IRA. The default setting is 5% of gross pay, and employees may opt out of the program at any time if they wish.
The Maryland Small Business Retirement Savings Program was signed into law in 2016, and implementation is expected to begin in 2022. The program allows small businesses to offer retirement options to their workers. It is a voluntary program, with no legal deadline for companies to sign up.
The state-sponsored CORE Plan aims to provide employees of nonprofit organizations a post-tax 401k savings plan as a retirement fund. All nonprofits with 20 employees or fewer are eligible for the plan.
The New Jersey Secure Choice Savings Program became law in 2019. This program requires companies with 25 or more employees to provide a public retirement plan option for its workers. Enrolled workers take a deduction from their paycheck, which is placed in the account. These employees also have the option to retain the account in the event they change employers. The anticipated start date for this program is March 2022.
The New Mexico Work and Save Act is expected to go into effect in 2022. The act provides a Roth IRA for employees who lack other retirement plan options. Like similar programs in other states, it functions via automated payroll deductions from enrolled employees. The program is 100% optional for both companies and their workers.
The state legislature has submitted Bill Number A8332F, intended to create an IRA for individual employees lacking company-funded options. This proposition would also be funded by automatic payroll deductions over time. The legislature has yet to vote on this bill.
OregonSaves closely resembles the California program. All companies in the state with five or more employees are required to register. Companies with four or fewer employees will have to begin registering sometime in 2022 as well. The program assists employers who can’t provide a private retirement plan of their own. Employees can access the funds placed in their individual IRA at any time, and can similarly opt out at any time.
HP2174, currently up for debate in the Virginia State Legislature, introduces a state-facilitated Roth IRA account similar to those in other states. As the bill currently stands, it will offer the IRA to employees of any company with 25 or more workers that does not currently have a private retirement plan. Employee participation in the program is voluntary, though the bill’s contents may change as the legislative process continues.
The Green Mountain Secure Retirement Plan was passed in 2017 and implementation was supposed to begin in 2019. However the plan has been delayed over clarification of certain pertinent federal laws. It is a voluntary public retirement plan, scheduled to roll out in waves. Additional details have yet to be refined, with a stated 2021 rollout likely delayed until 2022.
Washington’s Small Business Retirement Marketplace partners with private financial providers to facilitate an affordable retirement option for workers without access to employer-sponsored retirement plans. The program is free and voluntary, and enrollees may choose from a number of verified low-cost plans.
Employing Fiduciary Services to Source and Service Retirement Plans
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Prep for Future Labor Market With a Company Retirement Plan Today
- Matching contributions from the company, and the comparative percentage of those contributions.
- Funding and means of implementation, such as automatic deductions from an employee’s paycheck.
- Employee vesting, or tracking how many years a given employee must work before the retirement funds kick in.
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