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Only a third of working Americans are covered by an employer sponsored retirement plan, such as a 401(k). As a result, these workers may not have sufficient savings in retirement, forcing them to work longer.

To address this coverage gap, 17 states have enacted – and virtually every other state has considered legislation – that would create auto-IRA (Individual Retirement Account) programs that are designed for employees of employers who do not currently offer a private retirement plan. 

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In general, state auto-IRAs require employers to either offer a defined contribution retirement plan or enroll their employees into the state IRA. “Evidence is clear that requiring compliance materially increases retirement coverage and savings, and voluntary or incentive based models, such as Maryland's, do not have a meaningful impact on savings,” said Steve Abbott, Head of Government and Regulatory Affairs at payroll and benefits platform Gusto.

“[Our] analysis shows that employees are 20% more likely to contribute to a retirement savings account if they work for a company based in states that have auto-enrollment IRA policies.” 

However, individual state auto-IRA programs differ in several ways: 

  • Depending on the state, businesses with as few as 1-25 employees are covered by the requirement
  • Default contribution rates vary by state, and not all plans require that plans automatically increase contribution on a regular basis 
  • Penalties for non-compliance and incentives for compliance are different 
“Auto-IRAs increase coverage of retirement plans because most states require that employers of a certain size … either enroll their employees in the state plan or offer their own plan such as a 401(k),” said Abbott. “Our research shows that the compliance deadlines act as a decision point, with many employers opting to offer their own plans rather than enroll in the state programs.” 

Related: State auto-IRA programs hit snag: 2M workers can’t be verified, under federal rule


State programs are particularly benefiting individuals at or below the median income.
“Auto enrollment IRA programs increase average savings rates by 55% for earners at or below the median income in all retirement savings plans,” said Abbott. “The average worker making the median income or less increased their retirement savings rate from 2.2% to 3.4% following implementation of an auto-IRA program. This results in an increase in retirement income of $150 per month.”

Gusto's analysis also shows that auto-enroll IRA programs increase the average retirement contribution by 18% in all retirement savings plans.

“Because of auto-enrollment, employees have to take a specific action to un-enroll in the plans,” said Abbott. “The default is savings and the evidence is clear that auto-enrollment retirement plans meaningfully increase workers' savings. 

“Correctly designed programs, like those that create mechanisms in which employers automatically enroll their employees, increase participation and savings across the income distribution. This not only increases the availability of retirement for workers throughout the income distribution, but increases their financial security as well.”

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Lynn Cavanaugh

Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.