Your Finances . . . with Brenda Friederich: New law will require most employers offer retirement benefit packages
Published in the October 26 – November 8, 2016 issue of Morgan Hill Life
By Brenda Friederich
Downtown Morgan Hill is a great place to people watch. I often sit outside during lunch and marvel at retired folks enjoying a carefree lunch, walking their dog or leisurely going about their day. One way or another we will all get to that fabulous stage of retirement.
What will it take to be able to afford to enjoy a relaxed future free of financial worries? The answer is planning and time. The good news is the state of California is enacting a new law that might just help ensure that Californians take early steps to prepare themselves for a more secure future.
Do you have access to a 401k retirement savings plan at work? If you said no, you’re not alone. Nearly seven million employees in California lack access to a workplace plan. When it comes to saving for retirement, support from your employer matters.
Studies have shown that 90 percent of people with a retirement plan at work save for retirement versus 20 percent of those who don’t have one. Social Security can supplement, but it is not sufficient for the vast majority to enjoy a secure retirement. That situation creates problems for the individual that hasn’t saved enough, for the employer who benefits from a financially secure workforce, as well as for the country when millions are left unprepared.
In response to the need to expand access to retirement savings, particularly for small business employees, California Secure Choice (SB 1234) was recently signed into law. While some of the provisions of the program have not yet been finalized, this law goes into effect in 2017 with a tiered roll out during the next three years.
When the program is opened for enrollment any employer may choose to begin participating. Within 36 months of initial enrollment, every employer with five or more employees will be required to participate unless you provide an employer sponsored retirement plan such as a defined benefit plan, a 401(k) or similar retirement benefits.
As an employee, once your employer begins participating, you will be auto-enrolled and start by contributing three percent of your wages, or an alternate amount you choose, to your Secure Choice account. This account will be an Individual Retirement Account (IRA), whether ROTH or Traditional is not yet clear. Auto-enrollment puts compounding to work for you, the earlier you start saving and do so consistently, the larger your account will grow by retirement.
Each year, the amount can be automatically increased up to 1 percent. The Secure Choice Trust will invest the funds initially in safe investments like U.S. Treasuries with expanded options available after three years.
The IRAs would stay with you if you change jobs, and you can opt out at any time (even at the beginning). As with other IRAs, a tax penalty would apply if you withdrew the money before retirement. As an employer, you have a choice. Now is a great time to explore options to find the optimum solution for you and your employees. While you will be required to offer the Secure Choice plan if you don’t have your own, you may benefit from a more customized solution.
Exploring alternative retirement plan designs may offer additional benefits such as a better tax shelter with significantly higher contribution rates, more control over investment options, or expanded choice in how you use the funds in retirement. As an independent advisor with extensive experience with retirement plan benefits, we can help you understand your options, and implement a plan designed for your needs.
Brenda Friederich, CFP® is an Investment Advisor Representative with RNP Advisory Services, Inc., a registered investment advisor, in Morgan Hill. Reach her at (408) 779-0699 or bfriederich@RNPadvisory.com.