Navigating the New Era of Mandatory Retirement Plans

A growing number of states are passing laws requiring business owners to automatically enroll employees in retirement savings accounts.

Often called “auto-IRA (individual retirement arrangement)” programs, these policies require businesses without retirement plan coverage to participate in a state-sponsored IRA program. A number of states have already launched programs (some of which apply to businesses with a single employee), while other states are still in the process of creating one. Many U.S. states have introduced legislation that would adopt similar regulations.

This shift in policy affects small business owners in particular. According to the U.S. Small Business Office of Advocacy, small businesses employ 62.3 million people in 2026, totaling 45.9% of American workers.

What’s more, many small-business employers don’t offer retirement benefits, leaving a large number of people potentially on their own when it comes to saving for their futures.

This issue has long been a focus of policymakers. In the past, however, lawmakers used tax incentives to encourage employers to sponsor retirement programs for their workforces. But now, in the absence of federal regulation, some states and a few municipalities are taking matters into their own hands.

To contribute or not to contribute

Employees aren’t the only ones who are able to contribute to their nest egg. As the administrator of your company’s 401(k) plan, you have the option to match any, all or a portion of your employees’ contributions based on an amount and schedule that works for you.

You may want to front-load contributions to boost participation, contribute on a rolling basis with increases as time goes on or delay the start of contributions until employees have been with you for a predetermined amount of time. You can also choose to implement a vesting schedule for employer contributions, which helps incentivize employees to stick with you for at least a few years.

A look at state-sponsored IRAs

While each program and piece of legislation varies slightly, they all follow the same general idea. The legislation typically calls for the formation of a board that designs and oversees the program, creates the rules, selects plan providers and chooses the investment menu.

Through these programs, employers must deduct a specified percentage from each employee’s pay and transfer it to a Roth IRA in the employee’s name. In each following year, employers must increase that amount deducted from a paycheck (most designate this as 1%) until a maximum percentage is reached.

Employees can opt out of the program, change their contribution percentage or choose an investment option outside of the default. Companies that don’t maintain retirement savings plans for their employees and fail to sign up for the state’s mandatory auto-IRA program can be subject to penalties under most states’ laws.

Staying one step ahead

Even if your business isn’t based in a state eyeing a mandated auto-IRA program, you may want to consider offering employees a retirement savings plans. That’s because there is a federal movement to require companies to maintain plans.

In 2017, Congressman Richard Neal of Massachusetts proposed a federal mandate called the Automatic Retirement Plan Act. This bill called for businesses with more than 10 employees to automatically deduct and contribute 6% of an employee’s pay to retirement, with yearly contribution increases of 1%, up to a maximum of 10%. Neal proposed a similar mandate in 2021.

Neither of the two proposals were enacted into law, but the prospect of a mandated retirement program could be on the horizon and warrants careful consideration. Businesses looking to stay ahead of this curve can do so by laying the groundwork for an attractive retirement plan — a benefit that helps attract and retain quality employees.

J.P. Morgan has made it simple and affordable for business owners to create a retirement plan with a solution tailor-made for small businesses: Everyday 401(k) by J.P. Morgan. Setup is easy. You can get started today, or work with a retirement plan specialist to answer your questions, discuss your options and help you find a plan that meets the needs of your business and your workforce.

Click here to see if your state has introduced legislation impacting your business.