Beginning this year, the State of Colorado will mandate businesses of greater than five people offer a retirement savings plan for their employees. We’re fans of any program designed to encourage people to save more for retirement but anecdotally, the preparation from business owners appears low because of a lack of communication about the new program.
The U.S. outlook for retirement savings is grim. Retirement savings are “dangerously low” with a projected shortfall of $6.8 to $14 trillion, according to the National Institute on Retirement Security. The same organization estimates that two-thirds of working households have retirement savings less than their annual income.
In Colorado, an estimated 940,000 workers do not have access to a retirement savings plan through their employer. And while several saving vehicles exist for individuals, the traditional 401k plan continues to be the prevailing method. This is especially true if an employer automatically opts employees into the plan, minimizing the efforts an employee must take to participate. It makes saving “automatic,” and automated savings generally result in better outcomes according to the book “Nudge” by Richard Thaler. If employers don’t automatically opt-in employees, or worse yet don’t even offer a plan for their employees, it often contributes to a savings shortfall.
This was what the 2019 Colorado Secure Savings Act set out to address. Starting this year, any Colorado employer with five or more employees will be required by law to offer a retirement savings plan. Furthermore, it created a state-sponsored retirement plan as a default option for employers who don’t want to create or administer their own plan. Failure to offer a plan for employees will be met with increasing fines levied by the state.
While this is great news for Colorado’s workers and their financial futures, business owners and employers need to know their options for complying with the new rules and the penalties for inadequate preparation. Unfortunately, the communication from the state has been inconsistent at best, meaning many business owners will be surprised when they see the first notice arrive in mailboxes. They will need to visit the Colorado Secure Savings website to certify that a retirement plan is in place for their employees. Failing to do so may result in fines of as much as $5,000 annually.
As well intentioned as the state is, the details leave much to be desired. The plan offers few investment options for participants and requires calling a generic state-run phone bank for questions and help pertaining to the plans. Combined with the need to link in payroll records, this could end up being a real headache for those going with the “default” option.
Instead, I believe many businesses will be better served by setting up a custom plan that meets the needs and desires of their employees. Bolstered by cost-sharing techniques and other savings-focused legislation from the past few years, these once-expensive plans are now significantly more affordable, easier to administer, and often offer tax advantages and increased savings opportunities for business owners. As an example, the SECURE Act 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 retirement plan.
As retirement plans become more commonplace (hopefully!) a well-structured retirement plan can help attract, retain and reward talented individuals. Starting one can sound like a daunting task, but begin with a few simple questions and considerations:
• How much will employees want to save into the plan on an annual basis?
• Would they like the flexibility to choose between pre-tax and Roth contributions?
• Will the company match their contributions?
• Are there tax credits available for implementing a plan?
• What investment options do employees desire in a plan?
• Would employees value having access to financial education, credentialed financial professionals, and planning tools via the retirement plan?
Business owners should also be asking themselves how much they personally would like to contribute toward building their own financial future. The state-sponsored retirement account is subject to certain income and contribution limitations that may actually prevent the owners and other highly compensated employees from contributing.
If it wasn’t apparent, we’re big believers in saving until it hurts. But as humans we aren’t great at saving money, especially as the cost of everything around us continues to rise. The state’s efforts to address the retirement savings shortfall are welcomed and encouraged, even if the investment options are insufficient and the implementation poorly communicated. While it may represent a burden for business owners and “another thing to do,” I think it will prove worthwhile years down the road for Coloradans currently lacking an at-work retirement savings plan.
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 a 2021 Best-in-State Wealth Advisor, and a Barron’s 2021 Top Advisor by State. This column is not intended to provide specific investment advice or recommendations.
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