Employee demands for improved benefits have coincided with an increase in legislation combatting the elusive retirement crisis. It’s particularly pronounced at the state level, with automatic IRA provisions increasingly adopted across the country.
Colorado is just one, and many Centennial State business owners have begun to critically assess the value a retirement plan could bring to their organization. The competitive nature of the current job market—and the implications of the Great Reshuffle—only put more pressure on business owners to find unique ways to attract and retain talent.
With small businesses employing 48% of employees across Colorado, this pressure to remain competitive is exacerbated by fewer resources coupled with expectations that smaller businesses provide the same benefits as larger competitors.
Further, the pending Colorado Secure Savings Program, a state-mandated IRA program for businesses with five or more employees, will reframe this benefit from an opportunity to attract and retain talent into a requirement.
Despite initial concerns that small businesses would struggle to afford this benefit, the new year was met with record job and hourly earnings growth. Small businesses across Colorado contributed to a net increase of 25,126 jobs in the state by the end of 2021, a notable 99.7% of all new jobs created. The resilience of small businesses in the face of an unpredictable economic environment triggered by the pandemic is evident.
Impact of new legislation: Colorado Secure Savings Program
The Colorado Secure Savings Program is expected to affect nearly one million workers across the state currently without access to an employee-sponsored retirement plan. Small businesses face a considerable administrative undertaking as they decide whether to adopt the state-mandated plan or seek out an option that may be more suited to the needs of their organization.
Colorado’s plan is set to officially rollout in early 2023, so time to comply is dwindling. Business owners are faced with an important decision: what type of plan is best for both current and future employees?
401ks vs state-mandated IRAs: Key differences
The Colorado program was created with ease of adoption in mind; the program is a relatively hands-off approach. Participating employers are not liable for investment decisions or performance, whether their employees’ opt-in or opt-out, and are not considered a fiduciary.
While this hands-off approach may appeal to some, there are significant limitations. Because the state mandate is a Roth IRA, participants are forced to make after-tax contributions.
So, unlike a 401k plan where the participant can choose whether to make tax-deferred contributions, the participant is locked into a savings account that may not be best suited to their retirement goals. The IRA program is not subject to the ERISA protections that require retirement plans to have fiduciary oversight.
Finally, the constrained investment selection and contribution limits—up to $6,000 and $7,000 if the participant is over 50—may impede many participants’ ability to save enough for retirement. IRAs also tend to have income limits that exclude employees earning above certain income thresholds. By contrast, the contribution limits for 401k plans are $20,500 and additional catch-up contributions of $6,500 for participants over 50 for all income levels.
Small businesses should consider all options that satisfy the state mandate instead of passively adopting the mandated IRA. While 401ks can be more hands-on, employers have more control over their offering—from investment selection to ERISA oversight and fiduciary support. Employees have more choice in how they want to save for retirement and the opportunity to reduce their taxable income.
Moreover, the federal SECURE Act works to both ease adoption of retirement plans, how much to save, and incentivize participation—through Saver’s credits and small business tax breaks.
Why ‘good’ fiduciary support is so important
Throughout the process of evaluating an existing retirement plan or considering starting one, it is important to reflect on the level of support your business needs. Small business owners already have a lot on their plate and may not have the resources to be an engaged plan sponsor. In this case, a plan that offers additional support from an advisor is likely more suited to the businesses’ needs.
An advisor could be brought on to make informed investment decisions and assume responsibility over more of the day-to-day processes. This level of support is provided by 3(38) fiduciary services, as they are responsible for exercising discretion in the investment offerings of a retirement plan. The plan sponsor delegates the authority to make changes in the plan’s investment lineup to the 3(38)-investment manager.
As employees are increasingly outspoken about how financial worries have detrimental effects on their health, relationships, and productivity at work, effective financial education and wellness programs are more important than ever to improve the satisfaction of your current workforce as well as attract high caliber employees.
Ultimately, identifying a partner, like Shelton Retirement Plan Services, that has a specialized client relationship team committed to supporting your employees while providing sophisticated 3(38) investment fiduciary services should be a top priority. Shelton is based in Denver and is a proud member of the Colorado small business community.
Carrie Della Flora manages the Client Experience team and is responsible for providing authentic client service and support to Shelton Capital Management’s 3(38) Fiduciary clients. Della Flora joined Shelton in 2018 with 16 years of industry experience, having recently worked at Matrix Financial Solutions
