Rickie Taylor | East Coast Regional Director

In my Jerry Seinfeld voice, “What’s the deal with these state-sponsored retirement plan programs?”

When the state program was announced I had a lot of questions and I’m sure many of you have similar thoughts and questions.  We are here to be a resource and help guide to a more efficient retirement plan experience.  There are FIVE questions that have been consistently asked that I will share in this article, which focuses on WHY you should and would want to give serious thought to NOT having your business owner clients opt into the state-sponsored retirement plan program. 

First Question:  What is this state-sponsored retirement plan program?

The average retiree in the United States receives $1,200 per month in Social Security income. For quite some time, the question has been, “Will Social Security be available in the not-so-distant future?”  Well, I’ll tell you, our legislators are certainly paying attention to that very question.  Our retirees are struggling to make ends meet with the lack of adequate retirement savings.  With this in mind, it was suggested states create a state-sponsored retirement program which varies from state to state, based on number of employees, tenure of the business and a few other variables like:

Is the business for profit or non-profit?

Does the business have a retirement plan in place now?

Does it offer their employees the ability to participate?

Second Question:  Who controls the state-sponsored retirement plan program?

Each state is responsible for their own state-sponsored retirement programs.  This is very important as you research the viability and ability of your own state’s pension plan.  Here in NJ, the state’s pension fund has been a major topic of discussion considering the massive shortfall in funding over the many years it has been existence.

One of the key points that I want to address is being sure to think about who you want to administer your retirement plan.  Of course, I am not here to bash any states fiscal department, but I think it goes a long way to state it might make more sense to work with a company that specializes in retirement plans as opposed to being told who to work with.

Third Question:  How can the state-sponsored retirement plan program help me as a business owner?

Any retirement plan should help the business owner by providing a plan that helps to reduce business taxes.  It should also provide a solid contribution to the owner and employees as part of the overall financial plan and be used as an employee retention tool. 

Fourth Question:  What are the features of the New Jersey state-sponsored retirement plan program?

  • Employers cannot match employee contributions
  • Participants may not borrow from their savings
  • The maximum contribution limit for employees 50 and older is $7,000
  • Plans are portable if employees change jobs

Although these features are designed to be minimal, I believe they are missing the mark in terms of how effective a retirement plan can be.  Most retirement plans provide flexibility in allowing a discretionary match and or a non-elective contribution.  This helps to provide maximum contributions to the participants. 

In addition to non-elective contributions, loans are NOT allowed.  Typically, the retirement plan serves as a great financial remedy tool when the unexpected happens.  Of course, the retirement plan should be the last resort, but at least it is there if needed.

The $6,000/$7,000 limit is less than half of what can be contributed by a participant in a 401k plan.  Isn’t it nice to know you could contribute more if you had the ability to do so?

In summary, when evaluating a state program compared to a 40(k) plan make sure you evaluate contribution limits, customized plan features, service model and flexibility of the provider.

Fifth Question:  What happens if I do NOTHING?

Employers may incur a penalty if they do not comply with the Program.  In the first calendar year, if the employer does not comply with the Program, the employer will receive a written warning from the State of New Jersey.  If an employer does not comply with the Program for a second year, the employer may be fined $100 for each employee who is not enrolled in the plan and has not opted-out.  If an employer does not comply with the Program for a third and fourth year, the employer will be fined $250 for each employee who is not enrolled and has not opted-out.  If an employer still does not comply with the Program by the fifth year or any subsequent year, the employer may be subject to a $500 per employee fine for each employee who is not enrolled in the Program but has not opted- out of the Program.

Employers that collect employee contributions, but do not deposit the contributions to the Program will be subject to a penalty of $2500 for the first offense, and $5000 for each subsequent offense.

These state mandated retirement plan programs can certainly serve a purpose.  My suggestion is to really look what the state program is offering and all that you could be leaving on the table if you are not working with a dedicated company solely focused on retirement plan consultation, design, and service.