Only 69 percent of private industry and 92 percent of state and local government workers had access to employer-sponsored retirement plans as of March 2022. Regardless of these U.S. Bureau of Labor and Statistics findings, retirement planning remains crucial to all workers’ financial future.
As the global workforce evolves, questions arise about the obligations of employers to offer retirement plans to their staff. This article sheds light on the legal and regulatory landscape surrounding retirement plans and their provision by employers.
The prevalence of retirement plans varies across industries and countries, with some nations enforcing strict guidelines on employer contributions and participation. In this context, we explore the diverse range of retirement saving programs, such as 401(k)s, IRAs, and pension schemes, and their potential benefits for employees.
To determine whether all employers are mandated to provide retirement plans, examining the applicable labor laws and exploring exemption circumstances is essential. In addition, we look into the potential consequences for companies that fail to comply with retirement plan requirements.
Different Types of Retirement Plans in 2023
Before diving into the complexities of employer-sponsored retirement plans, it is essential to understand the wide range of retirement plans available. This knowledge empowers workers to make educated decisions about their financial future, enabling them to discern better which plans can and cannot be offered by their employers.
What employers sponsor
Employees can avail of company-sponsored plans at little to zero cost, while employers get substantial tax incentives. Here are examples of those plans:
401(k) plans
A 2022 study shows Americans anticipate $1.25 million for a comfortable retirement. They may find this goal easier to achieve with a 401(k) plan, one of today’s most popular retirement options.
Employer-sponsored 401(k) plans, specifically, allow pre-tax savings to grow tax-deferred for retirement, with employer contributions amplifying benefits. Flexibility in investment choices is available, but not all employers are required to offer 401(k) plans.
Simplified Employee Pension plans (SEP)
Ideal for self-employed individuals and small businesses, SEP plans offer simple administration and employer contributions based on income. Employee contributions are not mandatory, making them a practical retirement solution for specific employers and their workforce.
Employee stock ownership plans (ESOPs)
ESOPs grant employees partial ownership of the company through employer contributions in the form of company stock. Employees gain an additional incentive to work for the company’s success, fostering a sense of ownership and loyalty.
Pooled employer plans (PEPs)
PEPs are new retirement options where multiple companies collaborate for a single, efficient plan. Small to medium-sized businesses benefit from cost savings and expert management. Workers should assess terms, fees, and investments before enrolling.
SIMPLE IRA plans
Suited for small businesses, SIMPLE IRAs allow employees to contribute from their salaries, with potential employer matches. Easy administration appeals to resource-limited employers, but contribution limits and vesting schedules require attention.
Profit-sharing plans (PSPs)
Profit-sharing plans are employer-sponsored retirement arrangements that distribute a portion of company profits to employees. Contributions are discretionary, providing flexibility for employers. Furthermore, this arrangement enables employees to share in the company’s success.
457 plans
Designed for specific public and non-profit organizations are 457 plans, enabling employees to contribute pre-tax earnings to a retirement account. Withdrawals typically occur penalty-free after leaving the employer’s service.
403(b) plans
Non-profit organizations and educational institutions offer 403(b) plans, allowing employees to save for retirement on a tax-deferred basis through salary reductions and employer contributions.
Cash-balance plans
Cash-balance plans are hybrid retirement plans combining defined benefit and contribution plan features. Employees receive annual credits, with the accumulated credits and interest rates determining the benefit amount.
Non-qualified deferred compensation plans (NQDCs)
These plans allow high-earning employees to defer some of their compensation to a future date, often at retirement. Participants benefit from tax deferral, though they bear the risk of the company’s financial stability.
What employers don't sponsor
Workers are usually more familiar with employer-sponsored retirement plans. However, there are some valuable programs not offered by employers. Here are a few worth understanding:
Traditional individual retirement accounts (IRAs)
These personal retirement savings accounts offer tax-deferred growth, where individuals make voluntary contributions with the option of mobile payments. With traditional IRAs, taxes are paid upon withdrawal during retirement.
Roth IRA
Similar to traditional IRAs, Roth IRAs involve contributions made with after-tax income, allowing tax-free withdrawals during retirement, provided certain conditions are met.
Payroll deduction IRAs
Employees set up IRAs through payroll deductions often integrated into their employers’ POS systems. This method is a simple way for workers to save for retirement with automatic contributions from their earnings.
Guaranteed income annuities
Insurance products providing a steady income stream during retirement are called guaranteed income annuities. Individuals make lump-sum payments or periodic contributions to receive guaranteed income payments for life or a specified period.
Cash-value life insurance plan
These life insurance policies have an investment component, building cash value that policyholders can borrow against or use as a savings vehicle for retirement or other financial goals.
Employer-Sponsored Retirement Plans: What the Law Says
The Employee Retirement Income Security Act of 1974, commonly known as ERISA, safeguards the financial interests of countless Americans, ensuring their retirement funds are intact and will be available for their future needs.
The U.S. Department of Labor implements ERISA via the Employee Benefits Security Administration (EBSA), which currently oversees retirement plans for at least 152 million workers, retirees, and dependents. For the fiscal year October 1, 2021 to September 30, 2022, EBSA recovered over $1.4 billion, including more than $422 million in recovered benefits and restored assets arising from individual complaints.
A federal law, ERISA establishes essential guidelines for retirement plans in the private industry. If an employer offers a retirement plan, ERISA dictates eligibility criteria, vesting periods, job absence implications on benefits, and potential spousal rights to benefits upon death. Most ERISA provisions apply to plans starting from January 1, 1975.
Does ERISA mandate employers to provide retirement plans?
ERISA does not mandate employers to create retirement plans. Instead, it sets minimum standards for those establishing such programs. The law does not dictate the specific amount a participant should receive as a benefit, but it ensures adherence to essential requirements and protections for plan participants.
Below are the ERISA guidelines employers choosing to sponsor retirement plans must keep in mind:
Comprehensive information and plan costs
Participants must be provided with comprehensive information about the plan, including essential details about its features and funding. The plan should ensure the regular and automatic dissemination of relevant information. While specific programs are free, others may involve a fee.
Standards and funding rules
Employers must adhere to the minimum standards established by ERISA for participation, vesting, benefit accrual, and funding in retirement plans. ERISA defines the duration of work required before an individual becomes eligible to participate in the program, accumulate benefits, and obtain a non-forfeitable right to those benefits. Additionally, the law outlines precise funding rules, obligating plan sponsors to ensure sufficient funding for their plans.
Responsibilities and fiduciary accountability
Employers are responsible for adhering to the directives of plan fiduciaries. According to ERISA, a fiduciary is typically defined as someone with discretionary authority or control over a plan’s management or assets, including individuals offering investment information or advice. Fiduciaries who fail to uphold the principles of conduct may be held accountable for reimbursing losses to the plan.
Employee rights and benefit guarantees
Employees have the right to pursue legal action for benefits and breaches of fiduciary duty. Additionally, ERISA ensures the payment of specific benefits in case of a terminated defined plan.
What are state-mandated retirement plans?
While there are specific regulations and tax rewards in place to encourage employers to offer retirement plans, the decision to provide such programs typically remains voluntary for employers. However, there are some exceptions and specific circumstances where certain companies may be required to offer retirement plans.
For instance, some states have implemented mandatory retirement savings programs for employees who do not have access to employer-sponsored plans. The nature of these state-level programs varies, and not all states have adopted them.
Understanding state-mandated retirement plans
A state-mandated retirement plan, also called a state-sponsored retirement plan, is a program where the state creates an individual retirement plan (IRA) for its residents. The state can either administer the plan itself or delegate its management to an external entity.
This plan is then made available to employees through their employers, who are often required to enroll their workers automatically. Note that employees can choose to opt out if they wish.
Without an existing qualified retirement plan, employers above a specific size must offer the state-sponsored plan or face penalties. This approach aims to increase retirement savings and coverage among workers in the state.
Note that laws and regulations can change over time, so it’s a good idea to check with the most recent information and consult legal or financial experts for up-to-date and accurate guidance on retirement plan requirements.
As of February 2023, employers in the following states are required to provide retirement programs to their employees:
- California
- Colorado
- Connecticut
- Illinois
- Maine
- Maryland
- New Jersey
- New York
- Oregon
- Virginia
Consequences for employers defying the state mandate
In states where employer-sponsored retirement plans are mandatory, non-concompliant parties are subject to penalties, depending on the state’s rules.
In California, violators may be fined $250 per eligible employee if the violation continues for at least 90 days after the notice. If the employer continues to ignore the warning for 180 days or longer, they will pay $500 per eligible employee.
In Colorado, non-compliant employers pay up to $100 yearly for every unenrolled but eligible employee and may pay a maximum penalty of $5,000 within a calendar year. Connecticut does not impose direct penalties, but companies violating the mandate could face civil action. In Illinois, non-compliant companies are penalized $250 for every eligible employee for the first year and $500 for each succeeding year.
These penalties serve as incentives for compliance and emphasize the importance of offering retirement benefits to eligible employees. Employers must know their state’s requirements to avoid additional expense and hassle.
Know Your Rights and Options for Retirement
The latest U.S. Census Bureau data shows half of women and 47 percent of men 55 to 66 years old have no retirement savings. Understanding your rights and exploring available options is essential in securing a comfortable retirement. By actively participating in these plans, you contribute to your own well-being and foster a more financially stable society.
In the Federal Reserve’s Economic Well-Being of U.S. Households Report for 2021, most non-retired adults had some form of retirement plan. Still, only 40 percent felt sure about their retirement savings.
This lack of confidence is often due to an individual’s inadequate knowledge of their retirement plan options. To avoid this scenario, educate yourself about the benefits and features of retirement plans available to you. As cliche as it sounds, your future is in your hands.
