The retirement problem in the United States is growing. The American Association of Retired Persons (AARP) reports that only 44 percent of employees in the private sector in Virginia have access to a workplace retirement program, leaving nearly 800,000 individuals without coverage. To address this issue, Virginia Governor Ralph Northam signed HB 2174 into law in April 2021, establishing a state-mandated workplace retirement plan, recently renamed RetirePath Virginia, for employers to offer to their employees.
Why Virginia Established a State-Mandated Retirement Program
Virginia established a state-mandated retirement program to address the growing retirement problem in the United States, particularly in the private sector. With only 44% of employees in Virginia lacking access to a workplace retirement program, many individuals are left with inadequate retirement savings. The state legislature took action to address this coverage gap and provide more retirement savings opportunities for nearly 800,000 individuals in the private sector who lack access to such a program.
The state-mandated program, RetirePath Virginia, aims to encourage eligible businesses to offer retirement benefits to their employees by providing a retirement program that employers can offer. The program is intended to be rolled out in phases, with a pilot in March 2023, and enrollment for eligible employers is scheduled to begin no later than July 1, 2023. The Virginia College Savings Plan board is responsible for the administration and development of the program.
In establishing RetirePath Virginia, Virginia joins Oregon, California, and Illinois, among other states, in implementing state-mandated retirement programs. By establishing such programs, states aim to increase the retirement savings opportunities for private sector employees and help address the growing retirement problem in the United States.
Furthermore, RetirePath Virginia offers compliance obligations for employers that help them stay compliant. Employers must register by the deadline, set up payroll deductions for employees, and hold an annual open enrollment period. Non-compliance incurs a penalty of $200 per employee annually.
Virginia established a state-mandated retirement program to address the coverage gap and help eligible businesses offer retirement benefits to their employees. As the program is rolled out and developed, eligible businesses should look into what best fits the needs of their employees and consider establishing a retirement plan such as a 401(k) or even a Pooled Employer Plan through a provider such as Paychex to satisfy the mandate.
Details of Virginia’s State-Mandated Retirement Program
Here are some details about the program:
Purpose: The purpose of the VirginiaSaves program is to help Virginians save for retirement. It is designed to be a simple, easy-to-use, and low-cost way for workers in Virginia to save for their future.
Eligibility: Any employer in Virginia with five or more employees that does not currently offer a retirement savings plan is eligible to participate in VirginiaSaves. Workers of participating employers are automatically enrolled in the program, but they can opt out if they choose.
Savings options: VirginiaSaves offers workers a Roth IRA as their retirement savings option. Roth IRAs are a type of individual retirement account that allows workers to contribute after-tax dollars and withdraw funds tax-free in retirement.
Automatic enrollment: As mentioned earlier, workers of participating employers are automatically enrolled in VirginiaSaves. This means that a portion of their paycheck will be automatically deducted and contributed to their Roth IRA. The default contribution rate is 5%, but workers can choose to contribute more or less.
Low fees: VirginiaSaves has low fees, which means that more of workers’ savings go towards their retirement instead of fees. The annual fee for the Roth IRA is $25, and the investment fee is 0.05% of assets.
Portability: Workers who leave their job can take their Roth IRA with them. They can also continue to contribute to their Roth IRA even if they switch employers.
VirginiaSaves is designed to be an easy and accessible way for workers in Virginia to save for their retirement. By automatically enrolling workers and offering a low-cost Roth IRA, Virginia is taking steps to address the retirement savings gap and help its citizens plan for a secure retirement.
RetirePath Virginia vs. Employer-Sponsored 401(k)
RetirePath Virginia is a state-mandated retirement program in Virginia that aims to provide an alternative retirement savings option for individuals who do not have access to an employer-sponsored 401(k) plan. While both programs aim to help individuals save for retirement, there are some key differences between the two.
One major difference is the source of funding. RetirePath Virginia is funded by employee contributions, while an employer-sponsored 401(k) plan is funded by both employee and employer contributions. In the case of RetirePath Virginia, employees can choose to contribute a portion of their paycheck to the program, which is then invested in a professionally managed portfolio. Employers are not required to contribute to RetirePath Virginia, although they can choose to do so.
Another difference is the level of control employees have over their investments. With an employer-sponsored 401(k) plan, employees typically have a range of investment options to choose from, including stocks, bonds, and mutual funds. In contrast, with RetirePath Virginia, employees do not have as much control over their investments. Instead, the program is designed to provide a simple, low-cost investment option for individuals who may not have a lot of investment experience.
One advantage of RetirePath Virginia is that it is portable. This means that if an employee changes jobs, they can take their retirement savings with them and continue to contribute to the program. In contrast, an employer-sponsored 401(k) plan is tied to a specific employer, so if an employee changes jobs, they may need to roll over their savings to a new retirement account.
Another advantage of RetirePath Virginia is that it is designed to be accessible to low-income individuals who may not be able to afford the fees associated with a traditional retirement account. The program is designed to have low fees, which can help individuals maximize their retirement savings over time.
RetirePath Virginia and an employer-sponsored 401(k) plan are two different retirement savings options. While both programs aim to help individuals save for retirement, they have some key differences in terms of funding, investment options, and portability. It is important for individuals to carefully consider their retirement savings options and choose the one that best meets their needs and goals.
What Employers Should Know About RetirePath Virginia
RetirePath Virginia is a state-mandated retirement program that aims to provide a retirement savings option for employees who don’t have access to an employer-sponsored retirement plan. Here’s what employers should know about RetirePath Virginia:
Employer Participation: While employers are not required to contribute to employees’ RetirePath Virginia accounts, they are required to offer the program to their employees if they have at least five employees and have been in business for at least two years.
Low Fees: RetirePath Virginia has low fees compared to many other retirement plans, which makes it a cost-effective option for employers to offer to their employees.
Employee Enrollment: Employees will be automatically enrolled in RetirePath Virginia at a 5% contribution rate, but they can change their contribution rate or opt-out of the program altogether if they choose to do so.
Retirement Savings Plan: RetirePath Virginia is a defined contribution retirement plan, similar to a 401(k), and it offers employees the opportunity to save for retirement through regular contributions and potential investment gains.
Portability: One of the benefits of RetirePath Virginia is its portability. If employees leave their current employer, they can take their account with them, which means they won’t lose their retirement savings if they switch jobs.
Simplified Administration: RetirePath Virginia is designed to be easy to administer for employers, with minimal paperwork and reporting requirements.
Employers should be aware of their responsibility to offer RetirePath Virginia to their employees if they meet the eligibility criteria. It’s a low-cost retirement savings option for employees who may not have access to an employer-sponsored plan and offers benefits such as low fees, portability, and simplified administration.
Compliance Obligations for Employers Under RetirePath Virginia
Under RetirePath Virginia, employers have certain compliance obligations that they must meet to ensure they are in compliance with the program. These obligations include:
Enrollment and Contributions: Employers are required to enroll eligible employees in the program and begin making contributions on their behalf. Employers must also ensure that employees are informed of their right to opt-out of the program.
Automatic Escalation: Employers must ensure that the automatic escalation feature of the program is functioning properly, which increases employee contributions over time.
Investment Options: Employers must offer investment options that meet certain criteria, such as low fees and diversified investments.
Employee Notices: Employers must provide employees with regular notices that inform them of their participation in the program, investment options, and fees associated with the program.
Recordkeeping: Employers must maintain records of employee enrollment, contributions, and investment choices. These records must be kept for a minimum of six years.
Reporting: Employers must report to the Virginia Retirement System on a regular basis, providing information on employee participation, contributions, and investment choices.
It is important for employers to stay up-to-date on their compliance obligations under RetirePath Virginia to avoid penalties and ensure they are providing their employees with a quality retirement savings option. Employers can consult with financial advisors or legal professionals to ensure they are meeting their obligations under the program.
Conlusion
Virginia’s state-mandated retirement program, RetirePath Virginia, offers a viable solution to help small businesses provide retirement benefits to their employees. With its low fees and simple administration, RetirePath Virginia makes it easy for employers to comply with state regulations and provide a valuable benefit to their employees. By enrolling in the program, employees can have access to a retirement plan that can help them save for their future and achieve financial security. As more states consider implementing similar programs, RetirePath Virginia serves as an example of a successful state-mandated retirement program that benefits both employers and employees.
