Are you aware that over 50 million private-sector employees in the US lack access to retirement savings plans like 401(k)s? But here's where it gets controversial: a growing number of states are now mandating that most private-sector employers provide 'auto IRAs' if they don't already offer a workplace plan. Each employee gets their own retirement account, with automatic contributions made from their paychecks. Oregon was the first to implement this in 2017, and today, 15 states have active auto-IRA programs, with two more in the process of implementation, according to the Pew Charitable Trusts. Plus, eight states are considering legislation to create their own auto-IRA programs this year. But are these mandates the solution to retirement insecurity? Let's explore the details and potential implications.
The States Leading the Way in Auto IRAs
The states with active auto IRA programs are California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Minnesota, Nevada, New Jersey, New York, Oregon, Rhode Island, Vermont, and Virginia. Hawaii is expected to open its program later this year, and Washington State will launch its program in 2027. Several states, including Alabama, Indiana, Kansas, Massachusetts, Michigan, Pennsylvania, Tennessee, and West Virginia, are considering auto IRA bills.
How Auto IRAs Work
State-based auto IRAs are Roth IRAs, funded with after-tax money that compounds tax-free. Employers automatically deduct a small portion of an employee's paycheck, typically 3% or 5%, and invest it in a target-date fund based on their anticipated retirement year. Employers then automatically increase contributions by 1% of pay annually until they reach 8-10%, depending on state rules. Employees can also choose to increase or decrease their contributions or opt out.
Benefits and Challenges
Auto IRA mandates won't solve retirement insecurity, but they can give participants a leg up. For low- and moderate-income workers, consistent contributions can grow to a point where they can delay Social Security, increasing their monthly benefit check for life. However, it's challenging for most people to save enough for retirement without a pension, and most private-sector employees won't receive one.
The Future of Auto IRAs
Starting in 2027, workers may qualify for a federal Saver's Match worth up to $1,000 annually, deposited directly into their Roth IRA. This replaces a non-refundable tax credit for low- and moderate-income workers saving for retirement. While auto IRA mandates won't solve retirement insecurity, they can encourage people to start investing, providing a crucial first step towards financial security in retirement.
