State-run auto-IRA & 401(k) programs: Changing the retirement plan landscape

State-mandated retirement savings programs have continued to gain momentum with three new programs passed by state legislatures this year. The total number of state programs now stands at 19 with assets nearing $1 billion, according to the Georgetown University Center for Retirement Initiatives. States are also beginning to explore interstate partnerships to help lower costs and increase the efficiency of state-supported plans, CRI said.

The driving force behind state-supported plans is the alternative high cost of doing nothing to address a significant retirement savings gap among private sector workers in the United States. This gap is a result of many small businesses struggling to afford the costs, administrative burdens and responsibilities of offering a plan. With a population that is increasingly aging with insufficient retirement savings, the demand for state government programs to act as a safety net could cost $1.3 trillion over the next two decades.

About 20-22 states propose bills each year related to establishing or amending state-supported retirement savings plans, said Angela Antonelli, CRI’s executive director. Those that passed this year include auto-IRA programs in Minnesota and Nevada and a voluntary multiple-employer plan (MEP) in Nevada. In addition, Vermont amended its plan from a voluntary MEP to an auto-IRA program. On average, workers are putting away about $100 monthly into state-supported plans.

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

During a recent webinar, CRI invited state legislators from Minnesota, Missouri and Nevada as well as state treasurers from Vermont and Colorado to share lessons they’ve learned in crafting legislation to create state-sponsored retirement plans as well as implementing them. Many of them reiterated the importance of persistence and flexibility in getting bills over the finish line.

Minnesota: For employers with 5+ employees

Sen. Sandra Pappas had been working to pass legislation creating a state-supported retirement savings plan since 2014. Passed this year, Minnesota’s auto-IRA program requires employers with five or more employees that do not already offer a retirement program to participate. There is no cost to employers, other than incidental costs incurred to modify their payroll systems to deduct and transmit contributions. Employees direct their investments into an array of funds offered through the state’s Board of Investment. Employees can elect for pre-tax or after-tax contributions or they can opt out of participation altogether. The program is required to be up and running no earlier than January 2025.

Nevada: Program for employees not offered a 401(k) in past 3 years

Nevada’s retirement savings program passed this year after three previous unsuccessful attempts sponsored by different legislators. This year’s successful effort to create an auto-IRA program was led by Sen. Dallas Harris, who noted the proposed bill received pushback on the auto provisions of the plan. However, to keep fees low, an opt-out structure ultimately was preferred. Participation in Nevada’s plan is required for employers with at least five employees that have not offered a program in the past 3 years. Employees must work 120 days before they must be covered. The program will be implemented in stages, and Harris said the bill left many details up to the board. “I knew that if we did not get people saving, our social programs were going to be in a lot of trouble 30-40 years from now,” said Harris.

Vermont: Will help those nearing retirement

Vermont’s retirement savings legislation was among several workforce-related bills the state was considering this year. These included costly paid family leave and expanded child care measures. Vermont Treasurer Michael Pieciak said the pitch for Vermont Saves was that it was a program that would have a big impact without a big price tag. Employers will only incur incremental HR costs and there are no ongoing costs to taxpayers. Pieciak noted Vermont’s economy has a large contingent of people in their 20s who have not settled into a career yet and are working in tourism, retail and restaurants. Helping that group begin saving early in their careers was a primary goal of the program. The bill also was concerned with people nearing retirement who could take advantage of increased benefits by delaying Social Security. Michael Pieciak said the bill enjoyed strong bipartisan leadership and passed without opposition in Vermont’s Senate and unanimously in the House. The program is expected to kick off in July 2025.

Missouri: A 401(k) for employers with 50 or fewer employees

After two unsuccessful attempts, Missouri’s Show Me Retirement Savings program made it over the finish line thanks to the leadership of Rep. Michael O’Donnell, who brought three decades of financial industry experience to the effort to craft a successful bill. He decided that a 401(k) approach would provide the best outcome for Missourians, especially because it allows for an employer match. The program applies to businesses with 50 or fewer employees and includes an auto-enrollment feature. Like Nevada, Missouri granted flexibility to the board to make decisions about investments, minimum contributions and other details that might change over time. The program, which will be administered by the state treasurer’s office, is scheduled to launch in September 2025.

Colorado: Program’s open to other states too small to support a plan

Colorado Treasurer Dave Young said he not only followed the example of California, Oregon and Illinois, which all had programs up and running, but he also relied upon their support to get Colorado’s program on the right track. He noted 40% of Colorado’s workforce did not have access to a retirement savings plan at work, which put the state on a path to incur $18 billion in costs to support under-saved retirees in the future. An important feature of Colorado’s program is the ability to partner with other states, which would allow it to bring down costs by having more assets under management while helping other states that may be too small to support a state-supported program on their own. The program is fully rolled out to all businesses in the state and penalties will begin in February 2024. The program has 21,000 funded accounts and 10,000 registered employees with about $5.6 million in assets under management. “It just changes the trajectory in the conversation about what can happen in the state,” said Young. “Instead of being mired down with an increasing problem, you’re actually taking positive steps to change that trajectory.”

Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel.