In the Spotlight

Retirement Debate: State vs. Federal

By Tom Foster

The debate over federal vs. state governance started with America’s Founding Fathers when George Washington, John Adams, Thomas Jefferson and James Madison first picked sides.

The Civil War was fought in part over state’s rights and the debate continues today in the Halls of Congress and the Courts. Lately, the argument over state vs. federal has found a new venue: America’s retirement savings plans. 

A cacophony of rising concerns about America’s lack of retirement readiness is echoing in the halls of state legislatures across America. Legislators are particularly worried that only four in 10 workers have access to an employer-sponsored retirement plan and half of all workers do not participate in one, according to data published in 2016 report by the Pew Charitable Trusts.1

The lack of access has prompted several states, including California, Connecticut and Illinois, to introduce or enact legislation mandating that employers offer retirement plans or allow workers to join a state-sponsored plan when implemented. Other states such as New York and Massachusetts are debating the issue in what could be the start of an accelerating trend.

There is no federal mandate for employers to sponsor retirement plans, However, some financial advisors who support 401(k)s and other defined contribution plans, which are regulated by the federal government, have expressed consternation about having to compete with state-sponsored retirement plans.

Fear not. The state movement could actually be your best ally when promoting 401(k)s and other defined contribution retirement plans.

First, the focus on retirement savings in many states has raised awareness of the need to save and is kick-starting the conversation with employers. More helpful is that the limitations and relatively bare-bones services and support offered by state retirement plans helps shine a light on the benefits of a well-designed 401(k). Any business owner who is serious about saving for retirement or helping employees save should consider compare a state plan to a 401(k) before making a decision.

Not all state plans offer the level of education, tools, resources and other support to prepare employees for retirement as nearly every 401(k) provider makes available. But the biggest differentiator may be the designs of the plans themselves.

What initially interests most business owners about sponsoring a 401(k) is the ability to make healthy contributions to the plan on their own behalf. So how does a 401(k) compare with state plans?

Most if not all state-mandated retirement plans have been established as Roth IRA accounts, meaning that participants contribute after-tax dollars that grow tax-deferred and can then be withdrawn tax-free after age 59-1/2. The 2016 annual contribution limit for a Roth IRA is $5,500, and another $1,000 due to a catch-up provision offer those  age 50 or older.

Meanwhile, the 2016 contribution limits for 401(k) plans is $18,000 for employees, and a catch-up provision of another $6,000 for those age 50 and older. Employer contributions and matches can push the annual total limit to the lesser of 100 percent of an employee’s compensation or $53,000 ($59,000 for those old enough to take advantage of the catch-up provision).

The differences in contribution limits seem to indicate that the debate should be over before it ever really gets started. When you examine the bottom line, there is really no comparison. When discussing the merits of sponsoring a retirement savings plan with a business owner, the provisions of state retirement plans are your best argument for a 401(k).

Thomas Foster Jr. is Assistant Vice President, Strategy and Relationships, for Massachusetts Mutual Life Insurance Company (MassMutual)

This article is for informational purposes only and should not be construed as legal, investment, and/or tax advice.  Please consult your own legal counsel and other experts regarding the specific application of the information set forth herein to your own plan and/or circumstances.


Who’s In, Who’s Out, A look at access to employer-based retirement plans and participation in the states, the Pew Charitable Trusts, January 2016, p. 1,