Colorado Secure Savings Mandate - What you need to know
If you are an employer in Colorado and you have more than 5 employees, you will need to either initiate a private retirement plan for your company or enroll in the state-sponsored Colorado Secure Savings Program.
Employers must implement the Colorado Secure Savings Program for their employees if they have:
Five or more employees at any time during the calendar year
Been in business for at least two years, and
Not offered a qualified retirement plan in the preceding two years
Registration deadlines:
Employers with 50+ employees: March 15, 2023
Employers with 15-49 employees: May 15, 2023
Employers with fewer than 15 employees: June 30, 2023
If you do not enroll within one year of the registration deadline, your business will be fined $100 per employee, per year, ratcheting up to as much as $5,000 per year.
The Basics
The Colorado Secure Savings Plan is a state-sponsored retirement savings program designed to help Colorado residents save for their future. The program was created in response to the growing number of Americans who are unprepared for retirement and do not have access to a workplace retirement savings plan.
One of the main benefits of the Colorado Secure Savings Plan is that it is available to all Colorado residents, regardless of whether they are self-employed or work for an employer. This makes it an attractive option for people who do not have access to a traditional 401(k) or other workplace retirement plan.
Participants in the Colorado Secure Savings Plan can contribute to their accounts through payroll deductions or by making contributions directly. The program offers a variety of investment options to choose from, including mutual funds and exchange-traded funds (ETFs).
One potential drawback of the Colorado Secure Savings Plan is that it does not offer employer matching contributions, which are often available with traditional 401(k) plans. However, the program does offer a tax credit to help offset the cost of contributions for low- and moderate-income participants.
Overall, the Colorado Secure Savings Plan is a valuable resource for Colorado residents who are looking to save for retirement but do not have access to a traditional workplace retirement plan. It offers a convenient and flexible way to save for the future and can help Colorado residents build a secure financial foundation for their retirement years.
The Good Part
Some of the main benefits of the plan include:
Automatic enrollment: Participants are automatically enrolled in the plan, but they can opt-out if they choose to.
Convenient payroll deduction: Contributions to the plan are made through payroll deduction, making it easy to save on a regular basis.
Investment options: The plan offers a range of investment options, including a target date fund that automatically adjusts the asset allocation based on the participant's age and retirement horizon.
Professional management: The plan is professionally managed, which can help participants maximize their investment returns and minimize risk.
Portability: Participants can take their account with them if they change jobs or move out of state.
Free to the employer: the plan does not have an associated cost for employers, employees will only pay the fees associated with their investments (ie management fees for ETFs and mutual funds)
The Less Good Part
There are a few potential drawbacks to the Colorado Secure Savings Plan that you should consider before deciding whether to participate in the program. These include:
Auto-enrollment: all employees are auto-enrolled and the plan will deduct 5% of their paycheck unless they opt out in the first 30 days. This may cause financial stress for employees who are not familiar with the program or are not aware of how the deduction may impact their cash flow.
Limited contribution limits: The maximum contribution limit for the plan is relatively low compared to other retirement savings vehicles, such as 401(k) plans. The account type associated with the plan is a Roth IRA, which has a contribution limit of $6,500 per year.
No tax benefits: because the program utilizes a Roth IRA, the money contributed is post-tax, meaning employees will not have tax deferral opportunities.
Lack of flexibility: Participants in the plan are limited to the investment options offered by the plan, which is administered by State Street.
Potential fees: Some of the investment options in the plan may have fees associated with them, which could reduce the overall return on your investment.
No loans or withdrawals: Participants in the plan are not able to take loans or make withdrawals from their accounts, except in certain circumstances, such as disability or death.
General Concerns
This plan excludes high-income employees, specifically those above the income limits for a Roth IRA. This often excludes the key employees of the firm who are usually challenging (and essential) to retain.
There is no guarantee of the quality or support that will be provided to employers and employees by the state, which could hurt rapport for the business or simply be considered inconvenient.
Using Oregon’s plan as an example, which was the first state to implement a similar program in 2018, this program may cause additional administrative tasks and stress for employers. For example:
Submit an employee census annually & ensure all eligible employees are enrolled
Track eligibility status for all employees
Provide enrollment packets to all employees 30 days after the date of hire
Plus, track whether each employee has opted in or out
If an employee doesn’t opt out within 30 days, set up a 5% payroll deduction
Manually auto-escalate all employees annually unless they’ve opted out
Repeat the auto-enroll process annually for all employees who have opted out
Employers must do a 6-month look-back for auto-escalation:
Track if the employee has been participating for 6 months with no auto-escalation
Provide 60-day notice if they do not opt-out again
Hold open enrollment
Auto-enroll anybody who hasn’t been participating for at least 1 year
Summary
The plan is overall a fantastic opportunity and any program that encourages savings is something we endorse. For employers who want a simple, self-explanatory method to administer a retirement plan, this is such a good option!
That said, for many employers a privately administered retirement plan is a superior choice. By choosing your own retirement plan, you can:
Allow your employees to save far more (up to $22,500 in 2023 vs $6,500).
Select your own investment catalog or work with an advisor you trust to do with your guidance.
Allow high-income earners to participate in the plan.
Guarantee the level of quality provided by your advisor, plan sponsor, and plan administrator.
If you are interested in implementing an employer-sponsored retirement plan ahead of your deadline, I would be happy to help! We can chat for an hour about the complexities of the plan and your role as either an employer or employee or I can help you implement an employer-sponsored plan. Happy to help in any way I can!