State Run significant portion of Americans, roughly 48%, lacks access to a workplace retirement plan. Recognizing this gap, several states are taking proactive steps to address the issue and enhance residents’ financial well-being. By the end of 2023, seven states – California, Colorado, Connecticut, Illinois, Maryland, Oregon, and Virginia – had initiated “auto-IRA” programs, signaling a growing trend in state interventions.
Understanding State Run Auto-IRAs:
- Auto-IRA Defined: Auto-IRA stands for automatic-enrollment individual retirement account. These programs mandate certain-sized companies to either provide their retirement plans or facilitate payroll deductions into a state-sponsored IRA, with no cost to the employer.
- Automatic Payroll Deduction: If companies opt for the state-sponsored option, a portion of employees’ paychecks, typically ranging from 3% to 5% of earnings, is automatically contributed to the state plan. Workers have the flexibility to opt out of this arrangement.
- Widespread Participation: Over 800,000 workers are currently participating in auto-IRAs, amassing over $1 billion in total savings. On average, participants save about $165 per month.
State Run Initiatives and Expansion:
- Pioneering States: Oregon took the lead in 2017 by implementing the first auto-IRA program. Since then, six other states have followed suit: California, Colorado, Connecticut, Illinois, Maryland, and Virginia.
- Upcoming Programs: Several other states, including Delaware, Hawaii, Maine, Minnesota, Nevada, New Jersey, New York, and Vermont, are set to launch similar programs in the coming years.
Why States Are Intervening:
- Addressing Retirement Savings Gap: The move reflects a collective acknowledgment that a substantial number of individuals are not saving adequately for retirement.
- Shift from Pensions to 401(k)-Type Plans: With companies moving away from pensions in favor of 401(k)-type plans, individuals bear more responsibility for their savings. The average saver aged 55 to 64 has only $71,000 in 401(k) savings.
- Population Aging: The aging U.S. population further compounds the issue. The ratio of working-age households to elderly ones has declined from 3.9 to 1 in the 1980s to about 2.5 to 1 currently.
Challenges and Drawbacks:
- Lower Contribution Limits: Auto-IRAs have lower annual contribution limits compared to 401(k) plans ($7,000 vs. $23,000 in 2024).
- No Employer Match: Unlike many 401(k) plans that offer an employer match, auto-IRAs lack this additional benefit.
- Coverage Gaps: Not all state workers are covered, and gig workers may not have access. Some of the smallest companies may also be exempt, depending on state rules.
Conclusion:
While auto-IRAs are not without drawbacks, their implementation represents a significant step toward closing the retirement savings gap. By providing an accessible and automatic savings mechanism, these programs aim to encourage more Americans to actively save for their retirement, fostering financial security and resilience. As more states consider or expand such initiatives, the landscape of retirement savings may witness a positive shift
benefitting a broader segment of the population.