Dec 3, 2024
There’s a looming retirement crisis coming, driven in large part by the fact that Americans simply aren’t saving enough for their retirement. Some state governments are hoping an automatic form of workplace savings can help.
As of July 1, 2024, one-fifth of U.S. states have enacted automatic individual retirement accounts (auto-IRAs), according to Georgetown University’s Center for Retirement Initiatives.
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Almost all other states have at least studied some form of state-facilitated retirement savings program or have already enacted other programs for private sector workers. Why? They hope it will help workers with no workplace retirement plan save for their golden years.
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But does your state have one — and are you eligible?
So what exactly is an auto-IRA?
An auto-IRA is a retirement plan offered by the state to private sector employees who don’t have access to qualified workplace retirement plans such as a 401(k).
California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, New Jersey, Oregon and Virginia now have active auto-IRA programs. And, since 2012, at least 48 states and the District of Columbia have considered or enacted them.
Plan details vary from state to state, but in most cases participation is mandatory for employers that have been operating for at least a year or two. The company also has to have a minimum number of employees and must not already offer a qualified employer-sponsored plan.
Like the name suggests, employees of affected employers are automatically enrolled in the auto-IRA, though they can always choose to opt out or change their contribution rate. A Roth IRA is the default account structure for virtually all plans, but many also allow the option of a traditional IRA. Because most plans are based on Roth IRAs, the contributions are not tax-deductible.
Most plans have a default contribution rate of either 3% or 5% of the employee’s income, but many offer acceleration over time to 8% to 10% of their income. Generally, employer contributions are not allowed for auto-IRAs.
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Why have auto-IRA programs been enacted?
A lack of access to workplace retirement savings plans means many Americans are saving less than they should. According to the University of Pennsylvania, a whopping 56 million private sector workers are in this boat.
Only about seven out of 10 workers in the U.S. have access to either a defined contribution or defined benefit pension plan, according to the Congressional Research Service, and the numbers are much worse among certain demographics.
Fewer than half (48%) of private sector workers in the lowest wage quartile and only 53% of those at small businesses (with fewer than 50 employees) have access to an employer-sponsored pension plan. Among occupations, service workers are the most underserved group, with only 43% having access to a plan.
The problem is exacerbated by the fact that many workers with access to plans don’t bother to participate. Only 56% of all workers and 53% of private sector workers participate in a plan.
So why aren’t they contributing? In many cases, they’re choosing to keep their current income rather than build future income — but that’s not the only reason.
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In the past, many defined contribution plans required people to opt in. Many workers simply didn’t take the initiative to do so for reasons such as inertia or confusion.
Auto-IRAs appear to be achieving their objectives
The idea behind auto-IRAs is that automatically enrolling employees in a plan will help to get the ball rolling for their retirement savings by simply increasing participation — and so far, it seems to be working.
Research by gusto, a payroll and benefits company, found that in states with an auto-IRA program, workers are 20% more likely to contribute to a retirement savings account — and the average contribution has increased by 18% in all retirement savings plans. Auto-IRA programs were found to be particularly effective for workers with a median income or less, with their average savings rate increasing by a whopping 55%.
If you’re eligible for an auto-IRA, you may want to think twice before opting out and take the time to understand the program.
It’s also worth considering contributing the maximum amount you’re allowed under the plan so you can start to see your nest egg really grow.
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Vawn Himmelsbach is a veteran journalist who covers tech, business, finance and travel. Her work has been featured in publications such as The Globe and Mail, Toronto Star, National Post, CBC News, Yahoo Finance, MSN, CAA Magazine, Travelweek, Explore Magazine and Consumer Reports.
