State Retirement Plans for When You Don't Have a 401(k)
Governments are stepping in when employers won’t or can’t
A 401(k) is a common way for workers to save for retirement with the support of their employer. Unfortunately, many Americans don’t have access to one. Millions of self-employed people, the unemployed, and even employees of small businesses must turn to alternative retirement savings accounts, such as Individual Retirement Accounts (IRAs), for their long-term savings needs. According to the Pension Rights Center, about 47% of private-sector workers do not participate in retirement savings plans. In fact, 27% of private-sector employers don’t offer a retirement plan at all, with the percentage even higher in some states.
Some state governments, however, have been stepping in to assist those residents who don’t have access to a 401(k) by setting up plans that employers can then offer to workers. Here’s what to know about these state retirement plans and how to find out if you qualify.
Which States Offer Retirement Plans?
So far, 10 states have passed legislation authorizing retirement plans of some kind to help private-sector workers who may not have access to a plan through their employer. These include Oregon, Maryland, Connecticut, New Jersey, New York, Washington, Vermont, Illinois, Massachusetts, and California. Many other states are considering legislation that would allow them to offer plans to private-sector workers.
Note: These plans are separate from the pensions or retirement plans that states provide to public sector workers.
In most cases, employers are offered the option of opening a plan of their own, or choosing the state-run plan. Depending on the state, there may be penalties for employers who decline to offer a plan of any kind.
California’s plan was officially launched in July 2019, and the state is requiring all employers with five or more workers to offer the plan by the year 2022. The CalSavers plan would allow workers to have 5% of their salary (or another amount they select) automatically deducted from their paycheck and placed into a retirement savings account, where earnings can grow tax-free. In the case of California, the contributions automatically rise by 1% annually until they reach 8% of a worker’s salary, though workers can always opt out of the automatic increase.
In the case of California, workers are provided a selection of target date and index funds from which to select. All investments are managed by State Street Global Advisors, and participants pay a small annual fee that covers the administrative and operating expenses of their plan.
The employer is not required to match any contributions. The idea behind the plan is to make saving easier for the worker and to free the company from the cost of setting up a plan on its own.
Here are some details of other state-sponsored retirement plans for private-sector workers:
- Oregon: The OregonSaves program was the first of its kind. The plan automatically deducts money from paychecks and places it into a Roth IRA, with the first $1,000 in a Capital Preservation Fund, with any money above $1,000 going into a target-date fund based on the investor’s age. The state notes that it rolled out the plan because: “More people saving for retirement will mean more self-reliance when people reach retirement age and less strain on our already stretched social services.”
- Washington: The state created a Retirement Small Business Marketplace, with seven different retirement plan offerings, including IRAs and 401(k) plans.
- New Jersey: In 2019, the Garden State announced a Roth IRA that would require employers to deduct 3% from worker pay into the plan. Supposedly there will be penalties for noncompliance.
Differences From a 401k
Most state retirement plans operate more like a Roth IRA than a 401(k).
With a Roth IRA, your contributions are taxed upfront, which means you won’t be taxed on any gains once you withdraw money at retirement. A 401(k) works in reverse—contributions are deducted from your income before taxes are taken out, thus giving you a tax break now. But, you will be taxed later on any investment earnings.
Limitations to State Retirement Plans
Like 401(k) plans, the state retirement plans offered to private-sector workers can vary in the richness of offerings. In the case of California, for example, investments are limited to those offered by a single company and include mostly target-date funds and some index funds.
It’s also important to note that because state-sponsored plans typically operate as Roth IRAs, investors will be limited in how much they can contribute. For 2019, the federal government limits total annual IRA contributions to $6,000 annually, or $7,000 for people age 50 and older.
By contrast, for 2019, the limit on 401(k) contributions is $19,000 a year.
Because of these limits, participation in the state plan may inhibit your ability to save into a personal IRA.
Perhaps the biggest limitation to state-sponsored plans is that there is no obligation for the employer to match contributions. All money invested must come directly from the worker.
If you have access to a 401(k), it’s likely a better deal than a state-sponsored plan. Your contributions will be deducted from your income before taxes, which can help you reduce your tax bill. In addition, many employers match a certain percentage of the contributions that their workers make, thus boosting your potential earnings power over time. However, if that’s not an option, a state retirement plan may be the right fit for you.
Pension Rights Center: How Much Is Saved in 401(k)s
Paychex: "States Introducing State-Sponsored Retirement Programs Continue to Increase," Accessed Oct 30, 2019
State of California Employment Development Program. "CalSavers - Retirement Savings Program (formerly Secure Choice)," Accessed Oct. 28, 2019.
CalSavers. "Saving for Your Future," Accessed Oct 30, 2019
CalSAVERS. "Investment options for how you want to save," Accessed Oct 30, 2019
OregonSaves. "FAQ: What Does the State Gain by Providing This Program?" Accessed Oct. 28, 2019.
Retirement Marketplace. "Viewing Retirement Plans," Accessed Oct. 28, 2019.
Billtrack. "New Jersey Secure Choice Savings Program Act"; establishes retirement savings program for certain workers; establishes standard contribution level of 3 percent.*
State of New Jersey Official Website: Governor Murphy Signs Legislation Creating Retirement Savings Option for New Jersey Workers
IRS.gov: IRA FAQs - Contributions