State-backed auto-IRAs are closing the retirement gap for employers without a 401(k)

Employer-sponsored plans provide one of the best incentives for workers to save for retirement. “We know from the AARP that workers are 15 times more likely to save for retirement if they are offered a workplace retirement plan,” said Tyler Bond, research director for the National Institute on Retirement Security.

The reality, however, is that many employees simply don’t have access to such a plan through their employer.

“Despite really good movement at the federal level to encourage, simplify and incentivize employers to take up employer-sponsored plans, there is a general recognition that there will always be a certain cohort of businesses where offering their own plan isn’t something they are able to do,” said Courtney Eccles, vice president for state and client relationship management at Vestwell.

An increasing number of states are helping close this gap by offering auto-IRA plans. Bond and Eccles discussed this growing trend during Americans’ Views and Recent Developments of State-Facilitated Retirement Savings Programs, a May 16 webinar sponsored by the institute.

“We at NIRS have been supporters of these programs for a long time,” Bond said. “We really feel like these programs are a positive development in closing a very persistent access gap that has existed for decades. At the most basic level, people think they are really a good idea: 77% of Americans think it is either a pretty good or very good idea to have these programs, and most people say they would participate.”

According to recent research by the institute:

• Support across party and generational lines is high, especially among millennials (79%).
• More than three-quarters of Americans say they would participate in state-facilitated retirement programs, up from 75% in 2020. This support is consistent across party and generational lines.
• Americans view many key features of state-facilitated retirement programs as highly favorable, especially the fact that the programs would provide higher returns than other safe investments in today’s market (87%) and have low fees (86%).

Since 2012, every state except Alabama has either enacted or introduced legislation that would establish state-facilitated retirement savings programs. “Ten states already have fully operating auto-IRAs,” Eccles said, “and nearly 10 more have passed and signed into law legislation and are somewhere along the line in establishing their program.”

Although each program is different, the most popular type of plan that states are enacting automatically enrolls workers in moderate risk, low-cost retirement savings accounts. Broadly, the state-facilitated programs require private sector employers lacking retirement plans to provide their employees with access to retirement accounts through payroll deductions. Workers in states that offer these plans can access these accounts when they retire.

“For all of the states that have passed legislation, they are not identical, but there are a lot of commonalities in terms of their structure and design,” Eccles said. “The vast majority of these programs are overseen by a governmental entity or program board that is the fiduciary for the program. They select the investments, select the program administrator and together do all of the day-to-day administration of the auto-IRA. For every one of these programs, the employer role is really limited. Employers register, add their employees, make the appropriate payroll contributions for active employees and have ongoing maintenance of adding new employees.”

The Colorado SecureSavings program was launched just over a year ago.

“We have recently started the next wave of enrolling and renewing eligible businesses,” program manager Anna Stevens said. “We currently have nearly 55,000 funded accounts and almost 15,000 registered employers, which is amazing. We have $55 million in assets under management, and we expect these numbers to continue to increase as we now are pivoting to enforcement. It’s exactly what we hoped for.”

Maine joined the growing number of states more recently.

“We launched this year and just completed our first wave of employers,” said Beth Bordowitz, executive director of the Maine Retirement Investment Trust. “Maine is a very small state, with about 9,500 employers overall, and only one-third of those are in groups with 15 or more employees. Our big wave is just really starting with the remaining employers that have five to 15 employees. But I think we are doing pretty well. We are seeing a lot of activity. We benchmark to Colorado, and we are right where they were when they were in our position.”

Experts expect more states to implement auto-IRAs as employers and workers better understand the benefits.

Related: State-mandated retirement plans: 4 things small businesses need to know

“It’s so encouraging that nearly every state is examining options for expanding access to retirement plans for workers lacking plans at their job,” Dan Doonan, executive director of the institute and coauthor of the research report, said in a news release. “And it is equally encouraging that Americans overwhelmingly agree that the state plans are a good idea and that they would participate.”