States are revolutionizing retirement savings for private sector employees with automatic individual retirement accounts (auto-IRAs), addressing the decline of traditional pensions and lack of retirement plans.
At a Glance
- About half of private company employees lack access to retirement plans
- Auto-IRAs require employers without retirement plans to enroll workers in state-run programs
- 10 states offer auto-IRAs, with over 930,000 accounts and $1.7 billion in savings
- State programs complement rather than replace private retirement plans
- Auto-IRAs increase retirement contributions and access across various sectors
The Rise of Auto-IRAs
With traditional pensions becoming increasingly rare, states are stepping up to fill the retirement savings gap for private sector employees. Auto-IRAs are emerging as a powerful tool to encourage savings and potentially prompt companies to offer their own retirement plans. These state-run programs require employers without existing retirement options to automatically enroll their workers in Individual Retirement Accounts.
The implementation of auto-IRAs is a response to a pressing issue in the American workforce. “Americans are struggling to save for retirement,” John Scott, director of Pew Charitable Trusts’ retirement savings project, said. This struggle is particularly acute among employees of small businesses and nonprofits, who often lack access to traditional retirement savings options.
How Auto-IRAs Work
Auto-IRAs typically enroll workers at a contribution rate of 3 to 5 percent of their salary. While employees have the flexibility to adjust their contribution percentage or opt out entirely, the automatic enrollment feature capitalizes on inertia to boost savings rates. Employers facilitate payroll deductions but are not responsible for managing the plan or incurring fees, making it a cost-effective solution for businesses.
“Everyone should save for retirement,” Logan Van De Veer, a business owner in Connecticut, said. This sentiment reflects the growing recognition of the importance of retirement savings among both employers and employees.
Most auto-IRA programs offer Roth IRAs, which provide tax-free growth and withdrawals in retirement. Contribution limits align with standard IRA limits, and accounts remain portable, staying with employees even if they change jobs. While employers do not match contributions to auto-IRAs, the programs serve as a stepping stone to more comprehensive retirement savings options.
Impact on Private Sector Retirement Plans
Contrary to initial concerns, research indicates that auto-IRAs complement rather than replace private retirement plans. “Employers are not dumping their plans and sending workers to the state plan,” Mr. Scott noted. In fact, the introduction of state-run programs has spurred some employers to explore establishing their own retirement plans.
Studies show that states with auto-IRA programs have seen an increase in new private sector retirement plan creation. California, Illinois, and Oregon have experienced continued growth in new retirement plans at rates similar to or exceeding those in states without such programs. This trend suggests that auto-IRAs are not “crowding out” private plans but rather expanding the overall landscape of retirement savings options.
As the leading provider of state auto-IRA savings programs, we are excited to see our state partners teaming up to increase access to retirement savings across the country. Learn more in @pensionsnews article: https://t.co/LMpTGDUjBQ
— Vestwell (@Vestwell) May 23, 2024
The Future of Auto-IRAs
The success of auto-IRA programs is evident in their rapid expansion. Currently available in 10 states, with more planning implementation, these programs have already accumulated over 930,000 accounts with $1.7 billion in savings. As of August 2024, seventeen states have adopted auto-IRA programs, highlighting the growing recognition of their effectiveness in addressing the retirement savings gap.
“This evidence from California, Oregon, Illinois, and now Connecticut shows that state-facilitated auto-IRA programs are not crowding out private retirement plans,” researchers at Pew Charitable Trusts concluded. This finding underscores the potential for auto-IRAs to become a key component of the national strategy to enhance retirement security for all Americans.
As more states consider implementing auto-IRA programs, the impact on retirement savings is expected to grow. These initiatives not only provide a simple and accessible savings option for workers but also encourage employers to take a more active role in their employees’ financial futures, ultimately strengthening the private retirement plan market and expanding access to retirement savings across various sectors.
