A staggering 47% of U.S. private sector full-time and part-time employees—that’s 59 million workers!— lack access to employer-sponsored retirement savings plans, according to a recent study by the Georgetown University Center for Retirement Initiatives (CRI). And the Federal Reserve reports that about 25% of Americans have no retirement savings at all.
A growing number of states are attempting to address this disparity by implementing state-mandated retirement plans. Their goal is to increase access to retirement savings by giving small businesses the option to enroll in low-cost, state-sponsored programs.
While they may provide an easy, affordable way for employers to comply with state mandates, these state-run plans often offer fewer investment options—meaning it could be worth your while to consider offering a 401(k) plan of your choosing.
What is a State-Mandated Retirement Plan?
A state-mandated retirement plan is required for businesses of a certain size, along with other factors, like how long you’ve been in business. These requirements vary by state, as do plan designs, although most are set up as Roth IRAs (i.e., post-tax).
State-mandated retirement plans tend to offer lower fees and improve accessibility for workers, but often don’t provide the same strategic or financial advantages as employer-sponsored 401(k) plans, since they typically:
- Limit employer control over investment options
- Use state-selected investment firms
- Mandate contributions for employees unless they opt out
- Have lower annual contribution limits (often subject to the IRA limit of $7,000 for 2025)
Is My Business Impacted?
A growing number of states are implementing their own state-mandated retirement plan legislation, so it’s important to keep up with the laws in your state. Even if your business is located in a state without a mandate, you may still need to comply if you have employees reporting income in a state that does.
Because these plans differ from state to state, it’s best to check with your state’s agency to understand the requirements and deadlines your business is subject to. You can also work with a 401(k) advisor, who can help you navigate not only any laws that apply to your business, but also the options available to you regarding other retirement plan options.
What are My Options?
Speaking of, you may be wondering what your options are regarding a state-mandated retirement plan. If your business is subject to one, you can either enroll in the state program or offer a private retirement plan that meets state requirements, such as a 401(k). Either way, you’ll need to choose one to avoid penalties.
A state-sponsored retirement plan can offer simpler administration and a more affordable option, since the employer typically only has to register with the program and manage payroll deductions. As the name implies, the state acts as the plan administrator. However, these plans also tend to be more restrictive, as mentioned earlier.
Working with a 401(k) advisor to offer your own qualifying plan, on the other hand, comes with much more flexibility and options. 401(k) plans are accessible even to small businesses, as employers can:
- Find affordable options
- Choose whether to provide an employer contribution
- Enjoy tax benefits—employer contributions are deductible, and business owners can participate in the plan, too!
- Attract and retain talent in a competitive job market
Plus, under the SECURE Act and SECURE Act 2.0, businesses with fewer than 100 employees that set up 401K plans can claim up to $16,500 in credits over three years. Additional employer contribution credits are available for companies with up to 50 employees.
Not to mention, the annual 401(k) contribution limit is significantly higher than most state-sponsored plans—the 2025 limit is $23,500, allowing employees to better maximize retirement savings.
State-Mandated Retirement Plans vs. Employer-Sponsored 401(k)s: What’s Right for My Business?
While state-mandated retirement plans can simplify compliance and make it easier to offer a savings option, they’re not always the best fit for every business or every employee. Choosing to implement your own 401(k) plan gives you greater control, flexibility, and the ability to design a benefit that truly supports your team and strengthens your business.
From customizable contribution options to potential tax credits and incentives under the SECURE Act, a 401(k) can be a powerful tool for attracting talent and helping employees build a secure financial future—without adding unnecessary complexity.
Still wondering which path is right for your business? FSRP can help you explore your options, ensure compliance with state requirements, and create a retirement plan strategy that aligns with your goals.
Contact our experienced financial advisors today to get professional guidance on choosing the right retirement plan for your business.