However, the employers who are covered by these mandates should consider whether to comply with the mandated IRA arrangement or to proactively sponsor a 401(k) plan, which can offer broader benefits, flexibility, and competitive value. Financial professionals can help those employers understand the differences between the state-mandated programs and the sponsorship of a 401(k) plan. The purpose of this article is to provide financial professionals with information to help those employers.

This article compares state-run IRA programs with employer-sponsored 401(k) plans, analyzing the advantages and disadvantages of each from the employer’s perspective. The article considers the impact on higher-paid employees and rank-and-file workers, as well as the cost differentials and service offerings, and the operational and fiduciary implications of each.

Overview: The Typical State-Run IRA-Based Plan

State-facilitated retirement programs generally share several core characteristics:

• Mandatory Employer Participation: Employers with a minimum number of employees (e.g., five or more in California) and no retirement plan must register and implement the program.
  
• Employee Contributions Only: These are Roth IRAs, funded solely through payroll deductions. Employers may not contribute.
• Auto-Enrollment: Employees are automatically enrolled at a default contribution rate (e.g., 5%) unless they opt out.
• IRA Contribution Limits: Subject to IRS IRA limits (e.g., $7,000 for those under age 50 and $8,000 for those 50 or older in 2025).
• Default Investments: A default investment, typically a target-date fund, is used unless the participant makes an affirmative election. The investment options are selected by the state program’s investment oversight board.
• Investment Selection and Costs: Each state appoints an investment manager or board (e.g., CalSavers’ governing board) responsible for overseeing investment lineups. These programs typically offer a small, curated menu of low-cost index-based investments—including target-date funds, capital-preservation funds, and bond funds—designed to reduce risk and limit complexity. 
• Employer Duties: Employers must register, upload employee information, process deductions, and remit contributions. However, they don’t sponsor or administer the plan and have no fiduciary responsibility for the investments or plan operation.

State IRA programs are uniform and non-customizable.

Key Differences and Comparative Analysis

1. Plan Structure and Employer Control
   State IRA programs are uniform and non-customizable. Employers have no say in investment lineups, plan design, or contribution levels beyond processing payroll deductions. In contrast, 401(k) plans offer substantial flexibility in plan design, including eligibility rules, employer matching formulas, profit-sharing allocations, and vesting schedules. Employers can design a plan to align with workforce demographics and talent retention goals.


2. Benefits for Higher-Paid Employees
   The retirement savings opportunities for high earners are limited in state-run IRAs due to the lower annual contribution limits. For 2025, Roth IRAs are capped at $7,000 ($8,000 with catch-up contributions for participants 50 and over). In contrast, 401(k) plans allow significantly higher employee contributions—$23,500 in 2025, plus $7,500 catch-up contributions for participants 50 and older (and additional “super” catch ups for those ages 60-63)—and permit combined employer and participant contributions up to an overall annual addition limit of $70,000 (and with catch-up contributions in addition to that). Cross-tested or new comparability plan designs in 401(k)s can further enhance benefits for owners and highly compensated employees while remaining compliant with nondiscrimination rules.


3. Benefits for Rank-and-File Employees
   State-run IRAs are structured to facilitate participation among lower- and middle-income workers, with automatic enrollment and Roth treatment that may benefit those in lower tax brackets. However, these plans don’t permit employer contributions and generally don’t offer the same variety of investment education or tools that are available in most 401(k) plans. By contrast, 401(k) plans typically include broader participant communication, access to both pre-tax and Roth contribution options, and employer matching contributions. Some 401(k) plan providers also offer financial wellness programs and individualized advice.


4. Investments and Costs
   In state IRA programs, investment options are selected and overseen by a state-appointed investment board or administrator, usually in consultation with professional asset managers. The investment menus are intentionally limited to promote simplicity, and include target-date funds, capital-preservation funds, and basic index-based equity and bond funds. Fees are negotiated by the state and are usually inexpensive compared to average retail costs.
   
   401(k) plans, by contrast, pool the assets of all participants into a single trust, which often allows access to institutional-class mutual funds and collective investment trusts with fees that are also lower than retail costs. While administrative costs may be higher in absolute dollars, the net investment and service value can be more favorable, particularly as plan assets grow or when small employers join a pooled employer plan (PEP).
   
   

   Financial professionals can help employers with a comparison of fees, and costs between the state-run plan and an individual plan.

   
   Financial professionals can help employers with a comparison of fees, and costs between the state-run plan and an individual plan, or a PEP. Of course, fees should be viewed relative to the services provided and the additional contribution limits and flexibility of an employer-sponsored 401(k) plan.
   
   In addition, financial professionals can educate employers on the substantial tax credits for the first three years of administrative expenses, and the first five years of employer contributions.
   
   
5. Services and Participant Support
   State-run IRA programs are designed for simplicity. They typically offer online account access, default investment allocation, and limited participant communications. Call-center support and educational resources are available, but often generic and minimal in scope. In contrast, most 401(k) providers offer a more comprehensive suite of participant services, including one-on-one education, retirement income modeling, financial wellness tools, managed accounts, and customized enrollment communications. Employers may also receive compliance assistance, plan health reporting, and plan design consulting as part of the provider relationship.


6. Fiduciary Responsibility and Operational Complexity
   Employers participating in a state-facilitated IRA program don’t act as plan sponsors and assume no fiduciary responsibility. However, they’re responsible for administrative compliance, including employee onboarding, opt-out tracking, contribution processing, and ongoing remittance.
   
   Employers sponsoring a 401(k) plan have fiduciary obligations under ERISA, including the duty to prudently select, and monitor plan investments and service providers. These obligations, while significant, can be mitigated by joining a PEP or by engaging financial professionals as fiduciaries (e.g., 3(21) advisors, or 3(38) investment managers) or by using the services of 3(16) plan administrators.


7. Auto-Enrollment Requirement
   State-run IRA programs mandate automatic enrollment at a default contribution rate, typically 5%, with opt-out rights for participants. New 401(k) plans established under Secure 2.0 (starting in 2025) will also require automatic enrollment, beginning at 3% and escalating annually to at least 10%, unless participants opt out. 

Both solutions meet the state legal requirement to provide employees with access to a retirement plan, but they differ widely in scope, cost, and value. Employers evaluating their options should consider not only compliance and administrative ease, but also how each approach supports workforce retention, tax planning, and overall benefit strategy.

Financial professionals can provide real value to employers by explaining the differences about how each option will work and helping employers understand which is consistent with the employers’ short and long-term business goals.