State IRA Programs Give Workers a Retirement Plan Choice – But Self-Directed Investors Have Broader Investment Choices
Published on July 29, 2021
We’ve written before about the lack of retirement readiness for so many Americans. And although IRAs have been in existence since 1975, available to anyone with earned income to save for retirement, millions of workers rely on an employer-based plan instead—especially if they work for larger firms.
Policy makers in many states are trying to level the retirement savings playing field for millions of workers who do not have access to an employer-sponsored retirement plan. To do so, some states are mandating certain small businesses to offer a qualified retirement plan or automatically enroll their employees in a state-sponsored, payroll deduction IRA program.
The concern behind the mandate stems, in part, from these figures:
- The U.S. Bureau of Labor Statistics notes that 35% of private sector workers (representing approximately around 43 million Americans) work for companies with fewer than 100 employees. (S. Bureau of Labor Statistics, “National Business Employment Dynamics Data by Firm Size Class”)
- Fewer than 48% of those firms offer retirement plans to their workers, compared to the 94% of firms with 500+ employees. (S. Bureau of Labor Statistics, “National Compensation Survey: Employee Benefits in the United States”)
- The retirement plan gap widens further for people of color: according to the Federal Reserve, 68% of working-age white families have access to a workplace retirement plan compared to 56% of Black and 44% of Hispanic families. (FEDS Notes, “Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances,” September 28, 2020.)
The state-run IRA basics
The criteria differ slightly from state to state, but to put it into a nutshell, they require companies who do business in the state and meet a certain employee census to offer a qualified retirement plan or offer the state-run IRA program to their workers. Within this requirement, is an automatic payroll deduction for participants. Employees can choose to opt out, select a different contribution percentage, or select an investment other than the default, but there is no other plan flexibility.
As of May 2021, over 30 states are considering retirement savings plans for small-business employees, and 12 states are already implementing them. Here is the list of those states with the mandated IRA and links to their program details:
Greater flexibility and choice: a self-directed IRA
At Next Generation, we’re all about saving for retirement. We encourage all workers to open an IRA and contribute as much as they can, up to the annual contribution limits, based on the type of IRA they have. We’re also all about investment options—and for individuals who are comfortable making all their own investment decisions, a self-directed IRA offers tremendous flexibility about the types of investments they can include in their plan.
Self-directed IRAs have the same tax advantages as their regular counterparts, with funds growing tax free or tax deferred, depending on the type of plan. However, rather than relying on stocks, bonds and mutual funds, self-directed investors can diversify their retirement portfolios by including non-publicly traded, alternative assets – such as real estate, private equity, precious metals, notes and loans, cryptocurrency, and much more. Self-directed retirement plans create a hedge against stock market volatility while enabling individuals to invest in more creative assets, with the added potential of greater control over investment returns.
We applaud lawmakers for putting retirement readiness on their dockets and for encouraging Americans to save for retirement. But for savvy investors who know and understand alternative assets, an employer-based plan or state-run IRA program won’t come close to the nearly limitless investment choices a self-directed IRA provides.
Want to learn more? You may schedule a complimentary education session with a Next Generation team member; or email NewAccounts@NextGenerationTrust.com or call 888.857.8058 with your questions about the broad choices of alternative assets these plans allow.
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