The state of Maryland introduced the Maryland Small Business Retirement Savings Program and Trust in 2016, and the program was made available in September of 2022. Like many other similar state retirement programs, it mandates that all employers that do not offer a retirement plan to their employees participate in the state plan.
Employers who will fall under the mandates in the coming year may wonder whether this plan or an alternative is the best choice for them.
It’s estimated that up to 70% of the employers in Maryland are small businesses. Nationally, less than 25% of workers at companies with 10 or fewer employees have access to a work-sponsored retirement plan. With increased reliance on social services, which is ill-equipped to provide a comfortable living, it’s important to help employees become more involved in their own retirement planning.
The Maryland program is patterned after other successful programs, such as OregonSaves and CalSavers, with a couple of unique additions. It’s intended to provide a savings option for those who don’t already have one, not as a replacement for existing retirement plans.
This program, like several others, is essentially a payroll-deduction Roth IRA. It is for companies that have been in business at least 2 years, use a payroll service, and do not already offer a retirement plan to employees.
The accounts essentially belong to the employee, and can move with them from job to job, with no need for a rollover or other change.
Employees are automatically enrolled in the plan, at a default contribution rate of 5% of gross income. Participants can opt out, or they can change their contribution level any time. The plan also features auto-escalation, which increases their contribution by 1% per year, up to 10% of the gross income. The first $1000 are deposited into an emergency savings account, and subsequent funds are deposited into the IRA.
One unique feature of the program is the bridge option, which allows participants to defer their Social Security enrollment and receive MarylandSaves funds instead. Since many Americans claim Social Security before the full retirement age (67), which prohibits them from receiving full benefits, this deferment can potentially be useful to help Marylanders claim their full amount.
The program is available at no fee to employers, and they have no fiduciary or plan management responsibility. The employer is also barred from contributing to employees accounts. Their only obligation is to enroll, and to facilitate the payroll deduction.
At this time, no compliance timeline or penalties have been established.
The benefits of the Maryland program are clear: no cost and no liability for employers means the main barriers to work-provided retirement planning are removed. A closer look reveals some potential downsides.
1) Income Limits: If employees earn too much, they are not eligible for the program. It’s also not an effective vehicle for those who are close to retirement.
2) Contribution Limits: Far lower than a 401(k), Roth IRAs only allow contributions of $6,000/yr. If an employee has an additional private IRA, they’ll need to track these limits themselves.
3) No Matching: Employers are barred from making matching contributions to employee accounts.
4) No Protection: The Illinois program is not subject to worker protetctions under ERISA, which requires fiduciary oversight, plan information to be provided to participants, and the establishment of a grievance and appeals process.
5) No Tax Benefit for Employees: Since Roth IRA contributions are made post-tax, workers looking for more immediate tax benefits will not get them. By contrast, 401(k) plans offer both pre- and post-tax contributions.
6) Poor Investment Options: The small selection of investments available to Illinois employees may not be suitable for everyone. And, the default age-based target-date funds have been underperforming and may not be very helpful in accomplishing wealth building.
7) No Proven Effectiveness: Oregon was the first state to mandate a secure choice plan, which began in November 2017. By April 2020, the average account balance of it’s 67,000 participants was only about $750. This calls into question how useful these plans really are for encouraging retirement readiness.
If an employer is required to participate in something, they may find a 401(k) to be a better option for their business than the state-mandated program for several reasons. Most of these reasons are apparent when the downsides of secure choice programs are clearly understood, but three main benefits stand out.
1) Tax Benefits: Implementing a new 401(k) plan can potentially qualify an employer for up to $5000/yr in tax credits for 3 years. And, matching contributions are usually tax deductible. Many employers find they prefer to give the money to employees rather than spend it in taxes.
2) Employee Retention: A surprisingly high percentage of employees would rather receive additional benefits than a pay raise, and more than half consider benefits when deciding whether to accept a new job.
3) Less Burdensome than in the Past: Especially for small businesses, traditional 401(k) plans have been expensive, complicated, and come with excessive liability. New platforms like 401GO provide employers with an option that is inexpensive, unbelievably fast, and very low in administrative burdens and fiduciary liability.
New platforms like 401GO are becoming available now that give smaller employers flexibility and freedom that they never had access to before. For less than the cost of a gym membership, a business owner can give workers a robust 401(k) plan that levels the playing field and lets them compete in the labor marketplace.
Consider these features: