State auto-IRA program mandates nudge firms to launch their own 401(k)s

State-mandated retirement savings programs have continued to gain momentum and bridge the gap for many small businesses struggling to afford administrative costs. Since 2012, every state except Alabama has either enacted or introduced legislation that would establish state-facilitated retirement savings programs.

However, new research from Georgetown University’s Center for Retirement Initiatives has found that auto-IRA mandates at the state level dramatically increase the uptake of employer-sponsored retirement plans, even though employers in those states can elect to enroll in the auto-IRA program instead.

These new state auto-IRA laws are attempting to solve a problem: Few private sector workers in the U.S. save for retirement without an employer-sponsored retirement plan (ESRP), but only about half have access to one. As of June 30, 2024, there are 20 states that have set up new programs for private sector workers, and 17 of these states are auto-IRA program states.

Ten states currently have programs that require most employers to either offer a retirement plan or to enroll in an auto-IRA program, whereby they provide their payroll information to their state government and the employees are effectively enrolled in a Roth IRA by way of automatic payroll deduction. New Jersey and Delaware are the most recent states to implement such a program. Vermont, whose pilot launched on Oct. 1, will be the eleventh such state.

Employers in auto-IRA states are free to simply provide their payroll to the state to participate in the IRA program, a process which may be simpler and cheaper than sponsoring a new retirement plan. However, increased numbers of employers choose to start a plan instead in response to the mandates, the study argued.

“We estimate that at least 30,000 firms have been induced to offer an ESRP by these policies,” according to the Georgetown University report, Why Do Employers Establish Retirement Savings Plans/? Evidence from State “Auto-IRA” Policies. This is sizable, “considering that, for employers, establishing and maintaining an ESRP is more costly than utilizing the state-facilitated IRAs,” said the report.

Related: New SECURE 2.0 and state 401(k) programs that can boos participation rates

While it’s unclear exactly why firms choose to adopt their own retirement plans when they could easily participate in a state-run program, they tend to be “smaller, offer lower wages and are less likely to offer health insurance,” read the report. Also, employees at these firm find employer-sponsored plans “more valuable than auto-IRAs due to higher contribution limits” and “the ability to incorporate employer matching contributions.”