Almost half of private sector workers in the United States do not have access to employer sponsored retirement plans. This is one of the factors contributing to the large number of people who reach retirement age but have little to no retirement savings.
Some states have addressed these retirement savings gaps by introducing state-run auto-IRA programs that certain employers must offer if they are not offering another option like a 401K.
In this guide, you’ll find everything you need to know about these programs, and how you can take advantage of them.
Understanding the Retirement Savings Gap
According to a survey by Bankrate, 55% of Americans say they’re behind on their retirement savings. People don’t save for retirement for a variety of reasons, with many citing inflation as their current main roadblock.
Another survey found that more than 25% of Americans have no savings at all. Some data, according to the Center for Retirement Initiatives at Georgetown University says that only 5% of workers open a retirement savings account if one is not provided by their employer, but 72% of workers with access to an employer sponsored plan participate.
These kinds of statistics are what have spurred 19 states to create state-run auto-IRA programs in an effort to close the retirement savings gap. A side effect of this initiative, and a good one, is that the number of employers offering a 401K plan has increased.
What Are State-Run Auto-IRA Programs?
State-run auto-IRA programs allow employee contributions through payroll withholdings into an IRA established by the state. Employers in these states must facilitate these payroll deductions or offer their own employer-sponsored retirement savings plan.
State boards supervise the programs, and they’re managed by financial firms. Employers who do not facilitate the programs can be subject to penalties.
How State-Run Auto-IRA Programs Work
Each state program is different, but in general, employee contributions are invested into a Roth IRA. Contributions to a Roth IRA are not tax deductible, but withdrawals in retirement are tax fee. Most states are mandating these programs for employers who have more than a certain number of employees. Employers are not required to make contributions to the IRAs.
The investment firms that manage these IRAs are chosen by the state.
Some states require that employers automatically enroll employees for contributions that range from 3% to 5%, although employees may opt out of the program. In some states, the contribution limit increases for each year of participation and may be up to 10%.
The Roth IRA investments are generally made in a mix of investment vehicles based on the employee’s projected retirement age. Investments can include stocks, bonds, and income funds.
Some companies may be eligible for a tax credit based on their administrative costs of facilitating the plan.
Eligibility and Participation
States have different eligibility criteria for employees. In most states, both full-time and part-time workers are eligible and sometimes even contracted workers can access the plan. The plans are only available, however, to employees who don’t have access to an employer sponsored plan.
Some may also have minimum income requirements or work duration requirements for eligibility. There are typically no age limits.
Benefits of State-Run Auto-IRA Programs
Clearly, these programs make retirement savings accessible to workers who do not have access to employer-sponsored plans, which is their goal. The inclusivity of contract workers is also contributing to the retirement savings gap.
The automatic enrollment feature of the plans is also making participation more convenient for employees and encourages higher participation rates.
Additionally, the investment flexibility of the plans allows employees to invest based on their individual needs.
For employers, the plans require less administration than an employer sponsored plan, saving them time and money.
Overall, the plans enable and encourage employees to participate in retirement savings options, which increases their likelihood of financial security in retirement. Their IRA investment will grow over time, generate returns, and provide a retirement income to supplement their social security benefits.
Potential Drawbacks and Considerations
Unfortunately, the contribution limits of these programs are lower than those of 401K plans, which can result in inadequate retirement savings for employees. Also, employers do not make contributions, which also reduces the amount of potential retirement savings.
Employees also receive minimal investment guidance through these programs, and bear investment risk.
Additionally, these programs may have eligibility requirements that exclude some workers from participation.
Here’s a rundown of the state programs that have been enacted.
Illinois Secure Choice Retirement Savings Program
The Illinois program is required for employers with five or more employees who have been in business for more than two years and do not offer an employer sponsored plan. Contributions go to a Roth IRA by default unless employees choose a traditional IRA.
Contributions are 5% and automatically increase by 1% per year to a maximum of 10%. Employers are not allowed to contribute.
In Oregon the program is mandatory for all employers who do not offer an employer-sponsored plan. Contributions go to a Roth IRA by default unless employees choose a traditional IRA.
Like Illinois, contributions are 5%, increasing annually by 1% to a 10% maximum. Employees are automatically enrolled, though they can opt out, and employer contributions are not allowed.
The Maryland program is required for employers who do not offer an employer-sponsored plan and who pay employees through a payroll service or system. Again, investments go to a Roth IRA unless a traditional IRA is elected.
Contributions are 5%, escalating annually by 1% to a 10% maximum. The program is open to gig workers and independent contractors, as well as self-employed people.
Employer contributions are not permitted.
Connecticut requires employers with five plus employees that make more than $5,000 annually to participate. They also must have been in business for all of the previous year. Employers with less than five employees may not offer the plan.
Investments are made into a Roth IRA with no other options. Contributions are a flat 3%. Employer contributions are not permitted.
In California, the plan is mandatory for employers with more than one employee who do not offer an employer-sponsored plan.
Investments are made into a Roth IRA by default, unless a traditional IRA is elected. Employees must read disclosures before participating and may opt out.
Contributions are 5% with annual increases of 1% to a maximum of 8% of salary. Employers may be permitted to contribute.
New Jersey Secure Choice Retirement Savings Program
New Jersey requires employers who have 25 or more employees to offer the program if they have been in business for two years and have not offered a qualified plan.
Investments can be made into a Roth or a traditional IRA. Contributions are 3% and employer contributions are not allowed.
Colorado Secure Savings Program
In Colorado, employers with five or more employees are required to offer the program. Investments go to a Roth IRA by default, though employees can elect a traditional IRA.
Contributions are 5% and increase by 1% annually to a maximum of 8%. Individuals who qualify for an IRA can also voluntarily participate.
In Virginia, employers with more than 25 employees who work at least 30 hours per week are required to offer the program. The requirement applies to employers who have been in business for two or more years.
Investments are made into a Roth IRA unless a traditional IRA is selected. Contributions are 5% and increase 1% annually to a 10% maximum.
Individuals may also voluntarily participate if they have taxable Virginia income.
Maine Retirement Investment Trust
In Maine, employers with more than five employees who have not offered a tax-favored retirement plan at any time in the current year or the previous two years are required to offer the program. They must also offer the program to independent contractors.
Investments go to a Roth IRA, but the employee can opt to add a traditional IRA. Contributions are 5% with an optional 1% annual increase to a maximum of 8%.
New York State Secure Choice Savings Program
Employers who had more than ten employees for all of the previous year are required to offer the plan if they have not offered a qualified plan for the previous two years. The employers cannot end a qualified plan to instead offer the state plan.
Investments go to a Roth IRA and contributions are 3%.
Hawaii Retirement Savings Program
Employers in Hawaii must notify employees of the program, and if they choose to participate, the employer must facilitate the plan.
Contributions go to a Roth IRA at a contribution rate of 5%.
Delaware Expanding Access for Retirement and Necessary Saving Program
In Delaware, employers who have five or more employees and have been in business for at least six months of the previous year must offer the plan.
Investments go to a Roth IRA although a traditional IRA may be offered. The governing board may determine the contribution amounts which may be no less than 3% and no more than 6%. The board may also implement automatic annual increases of 1% to 2% to a maximum of 15%.
Minnesota Secure Choice Retirement Program
Minnesota requires employers with more than five employees to offer the plan. The program has just been enacted and no contribution rates have been specified yet.
VT Saves Program
In Vermont the program is required for all employers that have not offered a qualified plan for the previous two years. The contributions go to a Roth IRA although the state treasurer may opt to offer a traditional IRA as an alternative.
Contributions are 5% and can be increased by the state treasurer annually by no less than 1% and no more than 8%.
Nevada has just enacted a plan, but most specifics about the plan have yet to be determined.
The retirement savings gap is a huge problem in the United States, but state-run auto-IRA programs are making strides in addressing the issue. It’s likely that more states will adopt these programs in the coming years. If you want to find out if one is coming to your state, contact your state government for information.