Malky Robinson had been disappointed that her company didn’t include retirement benefits as part of her compensation package. But now, it seemed like her boss was going to have to change things up, like it or not. Malky had come across a news tidbit that mentioned the new NJ Secure Choice Savings program. The details were sparse, but it claimed that as of March 2022, New Jersey employers will need to provide access to a new State-run retirement account system.

When was this program going live, and what was in it for her?

Why a New Law?

Malky’s right about a new law. Passed in 2019, the New Jersey Secure Choice Savings Program Act will soon require many local businesses and mosdos to begin offering a retirement savings option to their employees. Because of costs and complexities, some small businesses don’t provide employees access to 401(k)-type retirement savings. But research shows that for many regular folks, a simplified payroll-deduction savings option is the key to building even a modest nest egg. And if these employees don’t save, they are likely to fall into poverty as they age.

The State’s Solution

The new law aims to rectify the gap in retirement plan access by requiring New Jersey companies and not-for-profit organizations that employ 25 or more workers to offer them some form of  retirement savings option. To help companies deal with the costs and complexities of running a typical 401(k) plan, the State will soon offer everyone access to new IRA-based accounts at no charge to employers. It’s still unclear when exactly the NJ Secure program will go live, but March 2022 is mentioned as a hard deadline in the law’s passage, so we should be hearing a lot of talk about this over the coming months.

Who is Affected

As of 2019, there were approximately 900,000 businesses and 50,000 charitable organizations in NJ, but the vast majority of them have too few employees to be affected by the new law. On the other hand, most large firms and organizations already offer 401(k) plans (possibly 403[b]s for charities) and are therefore exempt. But there are thousands of medium-sized operations that don’t currently offer retirement benefits and will need to decide whether to start a 401(k) type plan or join the NJ Secure program. NJ Secure will affect Lakewood significantly, including a large number of its mosdos which collectively employ thousands.

More Bark than Bite

But for all the hubbub NJ Secure will create, it shouldn’t be too big a deal for most employers. There is no requirement that employers deposit even an extra nickel into these new employee retirement accounts. The law also clarifies that any administrative or investment fees charged to operate NJ Secure will not come from employers either; the sole  “cost“ will be a bit of operational headache for human resource and payroll departments. While employers are entitled to grumble about the new regulations, NJ Secure will become just one more regulatory checkbox to mark off.

What Needs to be Done

NJ Secure will distribute employee information packets describing the program details, including how to sign up for an NJ Secure IRA account, select an amount one would like to deduct and deposit from their paychecks, and the investment options that will be made available to them. Employers will be obligated to hand out the packets and deposit whichever amounts the employees choose to withhold from their paychecks into the employee’s new NJ Secure IRA account. Every non-exempt employer will also need to submit a census report, and there are penalties for noncompliance. Note that unless an employee chooses to opt out, 3% of their pay must automatically be deducted and contributed to the state-run IRA on their behalf.

Payroll companies will likely charge for the extra work they’ll be doing, so there is a cost involved here, if an indirect one. But as state regulations go, NJ Secure shouldn’t be too onerous and may actually benefit many employees.

Paternalistic Benevolence

The paternalistic “in unless you opt out” approach is a very “blue” thing to insist on. But it does tend to work. Employees can always tell their employers at any point that they want to opt out, but most who begin with the default option probably won’t. Data from similar IRA programs in Oregon, Illinois, and California (note the blue states again) shows this. Most employees end up enrolled at about the default rate, which in those states is 5%. Trenton wants people saving for retirement, and NJ Secure is how they are forcing the issue.

More Fees for Less?

Still, employees shouldn’t get too excited about NJ Secure. Employers can’t contribute matching funds into NJ Secure IRA accounts even if they want to, so these accounts are no more beneficial than IRAs that anyone can open in five minutes through an online brokerage. In fact, NJ Secure will almost certainly be the inferior option versus regular IRAs—despite higher projected fees (possibly as high as 0.75%), NJ Secure will offer very limited investment options and account features. In contrast, you can get full-featured IRA accounts at Fidelity for free or close to it.

Time to do it Right?

Maybe we’ll be pleasantly surprised and NJ Secure will emerge with low fees and great investments. But if the State’s 529 plan is any indication, that’s not happening. Either way, some employers may decide that once they are obligated to offer access to a retirement benefit, they might as well do it right and set up a proper 401(k) plan. After all, 401(k)s offer much better tax shelters, streamlined investments, matching capability, tax-free loans, and guidance from financial advisers. Between NJ Secure and the pressing need employers face to up their employee recruitment and retention, 2022 should be interesting.

We are on COVID Time

As of this writing, there is still no NJ Secure website, no announcement of the program specifics, and no announced selection of an investment or administration company that will manage the logistics of this mammoth undertaking or the board members who’ve been selected to lead the program. While the statute is clear that NJ Secure must go live by March 2022, it was passed pre-COVID. It wouldn’t surprise me if the law will be amended to kick this can down the road. Stay tuned.