By the end of 2023, seven states - California, Colorado, Connecticut, Illinois, Maryland, Oregon, and Virginia - had adopted "auto-IRA" programs, and more are scheduled to be implemented. In these programs, companies must provide a workplace retirement plan like a 401(k) or aid their employees with contributions into a state-sponsored IRA. A total of around 800,000 workers have already signed up.
Approximately 48% of Americans don't have access to a retirement plan through their place of work, but states are striving to bridge this gap. AARP Research revealed that when given the opportunity to save for retirement through an employer-sponsored plan, Americans are fifteen times more likely to do so (and twenty times more likely if they are automatically enrolled). Seven states (California, Colorado, Connecticut, Illinois, Maryland, Oregon and Virginia) have adopted auto-IRA programs in an effort to make saving for retirement available to everyone - Oregon being the first in 2017.
An automatic-enrollment individual retirement account, which is referred to as an auto-IRA, is a program requiring companies of a specific size to either provide their own workplace retirement plan or facilitate payroll deductions into a state-sponsored IRA without charging the employer. This means that a set portion (ranging from 3% to 5%) of the employees' income will be put into this fund, but they are still able to opt out.
The Pew Charitable Trusts have reported that over 800,000 workers are involved in auto-IRAs, which have built up an estimated $1 billion in savings. The director of Pew's retirement savings project, John Scott, uncovered that the average amount of money saved per month is $165.
Scott commented that the amount of money taken out of each worker's paycheck each month was quite significant, and many of them had never saved for retirement before. According to Pew, nearly 195,000 employers are using payroll deduction to contribute to state-run auto-IRA plans. It is unknown how many other companies decided to offer their own 401(k) or other workplace retirement plans. Moreover, several other states are planning to begin programs in the coming years, such as Delaware, Hawaii, Maine, Minnesota, Nevada, New Jersey, New York and Vermont. (Massachusetts, Missouri, New Mexico and Washington already have programs in place, although employee participation is voluntary. Hawaii's program is slightly different in that employees must opt in to be a part of it.)
Scott commented on a shared understanding that individuals aren't setting aside sufficiently for retirement. Companies have begun to move away from offering pensions and are now focusing on 401(k)-style savings plans, with the duty to save falling on the employees. Data gathered by Vanguard reveals that in the 55 to 64 age group, the median 401(k) savings come to only $71,000. Vanguard's separate study shows that with the exception of the highest-income bracket (median income of $178,000) of Baby Boomers, most are predicted to be unable to sustain a secure retirement, even after factoring in Social Security.
The U.S. population is getting older. In the 1980s, the Center for Retirement Initiatives found that there were 3.9 households of working age for each elderly household; however, that ratio has since dropped to 2.5. Unless something changes, these trends could create financial problems for states. Policymakers anticipate that as the number of older people who don't have enough money to cover their costs increases, states may have to assign more funds to public assistance programs. Additionally, working people may have to pay more in taxes. According to Pew, state spending is expected to increase by around $334 billion from 2021 to 2040 due to lack of retirement savings.
Lawmakers have attempted to implement a national auto-IRA or similar program in recent years but were unsuccessful. The Center for Retirement Initiatives has highlighted that those without access to 401(k)s, such as those employed by small businesses, are significantly more adversely affected. Furthermore, the access discrepancies are even more pronounced among lower-income earners, younger people, minorities and women. As a result, Pew's research reveals that those participating in auto-IRAs are usually female, younger and single, with a higher proportion found among people of color with only a high school education.
Automatic enrollment into these plans is designed to encourage people to take action and fight laziness when it comes to joining a 401(k) plan. However, Scott stated that about 30% of people choose to opt out. Roth IRAs within these accounts also act as emergency funds. Scott mentioned that individuals are able to access their contributions (not earnings) anytime and at any age without facing a penalty, as income tax is already paid in advance for the money.
Experts indicated drawbacks to auto-IRAs. For instance, annual contribution limits for IRAs are lower than those of 401(k) plans - $7,000 compared to $23,000 in 2024. Data from Vanguard showed that only 15% of savers maximized their 401(k) contributions in 2022.
Furthermore, there is no employer match - the extra money that staff can get if their company runs a 401(k) scheme. As per the Plan Sponsor Council of America, around 80% of 401(k) plans provide a match. Auto-IRAs don't give access to every state worker either; gig employees, specifically, can't benefit. Depending on state regulations, the smallest companies may not have to take part either. According to Scott, "These are not perfect programs. Though, this does work. People are saving for retirement."
Comments