With pensions disappearing from the private sector and Social Security looking fragile, retirement savings has never been more important. Many states now require businesses of certain sizes to offer a retirement plan.
Most employees of Texas state agencies are members of ERS, a defined benefit retirement plan. ERS invests employer and employee contributions in various industries for long-term returns.
In a world where pensions are disappearing, Social Security seems fragile, and many people struggle to save enough for retirement,. This state-facilitated program is intended to help employees save for their non-working years. It will automatically enroll employees in an IRA (with contribution limits set by the federal government) if they still need access to a workplace savings plan. Americans are 15 times more likely to save for retirement when they can do so through their paychecks, so this plan could make a big difference in how much people have saved by the time they retire.
There are also plans for small businesses that give owners a flexible and low-cost way to reward their employees with company stock. These are called profit-sharing plans, designed to provide a financial incentive for companies of all sizes based on how well the company does financially. They’re also flexible in how employers allocate profits to employees’ accounts, and the allocations can be structured in various ways to match the business’s needs and goals. These benefits of a state retirement plan can be offered alongside or instead of a traditional 401(k) plan, with lower contribution limits than a typical 401(k). They’re typically funded through post-tax dollars.
Your contributions are tax-deferred, meaning the money you contribute to your retirement plan is taxable once you receive it as a benefit or refund. This helps you build your retirement savings faster since the money you earn from your investments isn’t taxed immediately.
If you’re enrolled in a defined contribution plan, you have an investment account that you fund with a percentage of your salary. When you retire, your total retirement benefit is based on the amount in your account at that time and on the performance of those investments. The investment accounts are administered by a service provider contracted with PEBA. You’ll choose a service provider when you start working on the plan.
Defined benefit plans, like the QPP, have a different retirement formula. This formula includes a base pension and an additional sum based on your years in the system or tier. It also consists of a formula for how much those benefits will cost over your life, which is estimated based on historical data and the best information available.
The QPP has seen several changes in recent years. This means new employees will pay higher contribution rates, serve longer to qualify for a pension, and may see reduced benefits once they retire.
Depending on the type of plan, employees can save pre-tax dollars to fund their retirement. These savings are intended to be spent in a lower tax bracket when the employee retires, creating long-term tax savings. This can benefit employees who need access to retirement plans or are self-employed.
Some state programs even offer retirement matching for employees. The employer contributes up to a certain amount to the employee’s account. This is a great incentive for the employee to max out their 401(k) contributions because they get free money in return for their investment.
Many tiers have a target asset mix based on an average across all members, but you can still create your portfolio by selecting the core investment options. This helps reduce the individual decisions you must make for each investment. Whether you choose a target asset mix or the core investment options, it’s important to understand how these investments perform over time.
Depending on the type of plan, some employees may also have additional retirement options, like an Individual IRA, SEP IRA or SIMPLE IRA, that aren’t available in state retirement programs. These accounts allow for more flexibility in investing and can be transferred when you leave your employer.
The landscape of retirement plans is changing in America. Pensions are disappearing, Social Security is fragile, and Americans worry about whether they can afford a comfortable retirement. State-mandated retirement programs are one way to help, and they’re coming to a workplace near you.
Currently, 14 states have a state-facilitated retirement program either active or in the works, including New Mexico’s unique plan, which has been instituted as both a Roth IRA and a retirement marketplace. As with any change, offering these programs has advantages and disadvantages, but ensuring that you’re prepared will ensure smooth implementation and compliance for your business.
Most of the current state-facilitated retirement programs cover private-sector employees. However, a couple of the upcoming registration waves will also include non-profits. Massachusetts, for example, has introduced the CORE plan to cover the needs of non-profits.
As these programs roll out, you must monitor deadlines and specific rules to comply with the law. But it’s also an opportunity to give your team great options for saving for the future. In a time when retirement may seem far away, allowing your employees to sock away money at work in an easily accessible way can make a big difference.
Many small businesses still need to offer retirement savings programs for several reasons. They might think that they can’t afford the cost, they might not understand how to implement one, or they might not have a lot of confidence in the government-run options available. In this uncertain economy, it’s more important than ever to show your employees that you care about their financial futures and are committed to helping them save for retirement.
Many state retirement plans offer security that’s hard to find in the private marketplace. A well-funded retirement plan provides peace of mind to both employees and employers. When employees know that their money is safe, they can focus on their work and feel confident that they will have enough income in retirement to live comfortably.
For example, state employees in Tennessee enrolled in the Hybrid Retirement Plan for State and Higher Education Employees, and K-12 Teachers can enjoy peace of mind knowing their retirement benefits are secure. These benefits include a lifetime pension based on their tier, calculated by the average earnings for the five highest consecutive years. This ensures members have a steady income stream in their golden years, even if they retire early or leave public service before reaching full retirement age.
With more states considering state mandates, small business owners must stay informed about deadlines and specific rules to avoid penalties. Offering a retirement plan can help employees save more for the future and improve overall workforce health. The right retirement plan provider can help them understand their options and choose a solution that fits their needs.