A relatively strong job market, new tax breaks, and state mandates are encouraging more small businesses to offer 401(k) plans to their employees.
California, Oregon, and Illinois have seen an increase in state mandates. These three states were among the first to compel private-sector employers that do not provide retirement plans to provide employees with access to state-sponsored programs.
Employees are automatically enrolled in individual retirement accounts. Employees have control over their assets and can choose not to save. Seven states have such programs in place, with four more in the works.
Instead of enrolling employees in state-sponsored plans, many businesses opt for the often-expensive option of establishing their own 401(k) plan. According to a Pew Charitable Trusts analysis released on April 14, companies in those three states have adopted 401(k) plans at a faster rate than the national average.
In California, for example, new 401(k)-type plans increased by 16% from 2013 to 2021, compared to 2013 to 2018. In 2019, the state launched its CalSavers Retirement Savings program.
Ben Parsa, 38, said establishing a 401(k) plan has been on his to-do list since the furniture company he co-founded in 2018, Caba Design Corp., hired a half-dozen senior managers in 2021.
The CEO of the Rancho Cordova, California-based startup said he didn’t prioritize the task until he was faced with a June 30, 2022, deadline to enroll in CalSavers.
“It was helpful to have a deadline,” Mr. Parsa, who now employs 70 people, said. “We had to do it right away, even if another priority came up.”
One of the primary advantages of a 401(k) for employees is that it allows those under 50 to save up to $22,500 per year, compared to $6,500 for Roth IRAs, the vehicle most state programs use. For those over the age of 50, the limits increase to $30,000 and $7,500, respectively.
New 401(k) plans are being established as labor competition has become more intense in recent years, prompting some employers to improve workplace benefits in order to attract and retain employees. It has also benefited from tax credits authorized and expanded by Congress in 2019 and 2022, which reduce the cost for many smaller employers of establishing a 401(k) plan and making matching contributions to employees’ accounts.
The initiatives are the most recent in a decades-long government effort to close a retirement savings gap that has left an estimated 56.5 million Americans, or roughly 48% of the private-sector workforce, without access to a workplace retirement savings plan.
There were concerns that the state programs would cause some employers to terminate existing 401(k) plans because they do not charge administrative fees or allow employers to make matching contributions. This does not appear to be the case.
According to John Scott, director of Pew’s retirement-savings project, the number of employers terminating 401(k) plans in California, Oregon, and Illinois has decreased in recent years, in line with national trends.
According to some 401(k) providers, the state mandates have been beneficial to their businesses.
Guideline Inc., a 401(k) provider based in Burlingame, California, says the share of sales attributed to California companies more than doubled in the three months leading up to a June 30, 2022, deadline for companies with five to 50 employees to enroll in CalSavers.
In 2022, Guideline advertised its 401(k)s as an alternative to CalSavers on billboards, buses, and other public places in Los Angeles, San Francisco, Sacramento, and San Diego, with slogans such as “Exceed the Retirement Mandate” and “Need to Meet the Mandate? Meet Guideline.”
Plan Design Consultants Inc., a Carlsbad, Calif.-based firm that provides compliance services to small businesses with 401(k) plans, reported a 60% increase in first-time plan sales in California in 2021 and a 35% increase in 2022.
Gusto Inc., a payroll, benefits, and human resources provider, reported a 35% increase in 401(k) sales in California in the spring of 2022 among clients notified of CalSavers’ June 30, 2022, deadline.
Unless they offer a plan, CalSavers will require the smallest employers with one to four employees to enroll in 2025.
Katie Selenski, the program’s executive director, said she welcomes the trend, even if it reduces participation in CalSavers, which has $483 million in assets.
“State mandates are giving private plan providers an opportunity to present the case for their products, which is a good thing,” she said, adding that CalSavers’ mission is to “expand access, whether that happens through CalSavers or a new 401(k) plan that emerges as a result of the mandates.”
Brian Douglass, co-owner of Common Stock and Farmer & the Seahorse in San Diego, said he and his business partner started a 401(k) plan in 2021 after discovering that CalSavers’ record-keeping system isn’t integrated with his payroll provider, Gusto. Due to the fluctuating hours, Mr. Douglass would have had to manually enter employees’ contributions each week.
Mr. Douglass stated that 84% of his nearly 100 employees participate in the 401(k) plan, with the majority contributing between 3% and 5% of their pay. The company matches 4% of the first 5% of pay that a worker saves, an expense that was around $50,000 last year.