Better together? State-mandated IRAs spurring growth of private 401(k)s

(Image: Shutterstock)

Who knew? The move by many states to require Roth IRA-type saving retirement plans for private-sector workers has not discouraged employers from sponsoring their own retirement plan benefits, a new study has found. In fact, in states like California, Oregon, and Illinois, employer-sponsored retirement offerings have grown at the same rates as in other states or surpassed those rates.

The study by Pew Charitable Trusts looked at data from 2021 and earlier, comparing the adoption of retirement plans in states that have required retirement savings plans to states that do not require a retirement savings plan for workers. “We were interested in how these programs affect workers, businesses, taxpayers, and in this case, the private sector market for retirement plans,” he said. “We [were asking], ‘Were these plans competitors, where maybe employers were dropping plans and going to the state plans, or is it a complementary relationship, where the state programs are actually working in synch with the private sector market,’” said John Scott, director of Pew’s retirement savings project. “The latter is what we found.”

A growing movement to help workers save for retirement

The study noted that Oregon started enrolling private sector workers six years ago in OregonSaves, the first state program to require retirement saving plans for workers. In the years that followed, 11 other states have established automated programs to help workers create their own individual retirement accounts. The plans are known as auto-IRAs, and automatically enroll employees into savings plans—although employees can choose to opt out. Employees contribute a portion of their paychecks and can raise or lower the percentage at any time.

Related: State’s auto-IRAs may encourage sponsors to offer savings plans

The PEW researchers looked at California, Illinois, Oregon because those are the first three states to launch such programs, and have the most data on uptake and results. “The analyses suggested that, in those states sponsoring automated savings programs, employers with plans continue to offer them and businesses without plans were adopting new ones at rates in line with, or even above, the national average,” the study said.

The researchers said that the biggest impact of these state-mandated programs may be with smaller and medium-sized businesses, but even with those employers, there are signs of improved trends in adopting private retirement programs such as 401(k) plans. The state auto-IRAs provide an option for the businesses not ready or able to make that leap.

Different results in different states

The results of these different state plans have not been uniform. The researchers noted that overall, California had a higher rate of retirement plan creation than the national average, and the state’s share of new (private) plans remained among the highest in the country. On the other hand, Illinois, saw a consistently lower share of new to existing plans than the national average since 2013, but the share of new plan creation in the state increased in 2021 by more than 1 percentage point.

“In all three states examined, the rate of introduction of new plans, as a share of existing plans, remained higher than before each introduced its savings program,” the study said. The results showed that in:

• California, the share of new plans rose from an average of 8.1% between 2013 and 2018, before the state’s CalSavers program began enrolling workers, to an average of 9.4% from 2019 through 2021.
• Illinois, the average share of new plans increased from 5.3% between 2013 and 2017 to 6.2% after Illinois Secure Choice started enrolling workers from 2018 through 2021.
• Oregon, there was an increase in the share of new plans from 6.7% on average between 2013 and 2016 to 8.5% on average in the years after OregonSaves started operations in 2017.

“The changes in the share of new plans pre- and post-implementation of the state programs aligns with national trends and in some cases proves larger than the national change,” the report said. “For example, compared with the California experience, the share of new plans in the U.S.—excluding California—increased from an average of 6.4% before 2019 to 7.3% from 2019 to 2021.”

A nudge toward retirement savings benefits

Scott said that more research is needed to fully tease out the effect of the state-created programs, but that there is anecdotal evidence, along with the current data, that suggest state-created plans have just added to a growing interest among both employers and workers about retirement savings benefits.

“Our research shows that employers want to offer these benefits because they want their employees to do well,” Scott said, adding that the desire to attract and retain employees by offering more robust benefits also plays a role. “There is always a pool of employers who are thinking about offering this benefit. When the state creates a plan, for the subset of employers that haven’t made a decision, it gives them a nudge to adopt [their own plans]. So, that’s why we’re seeing this bump up of new plans in these states.”

In addition, researchers observed that the private financial services industry has been seeing the state programs as a glass-half-full opportunity, rather than just competition. “We’ve heard anecdotally that they are going in and saying, ‘Hey, instead of a bare bones state program, wouldn’t you rather have a more robust 401(k) plan, with greater employer matching, greater investment choices, etc.’”

The report concludes by noting that at this point, the data does seem to indicate that state-mandated retirement savings plans complement the private market for such plans.

“Several years of data now suggest that states with automated savings programs can help fill the gap for employers who may not be ready or able to provide their own plans—without hindering the private market in those states.”