No 401(k)? An alternative has helped US workers save more than $1.7 billion

By some estimates, almost half of US private sector workers — close to 57 million people, according to AARP — do not have access to a retirement plan at their jobs. That’s either because their company doesn’t offer one or because they don’t qualify to participate in an employer’s existing plan. That is just one reason why policy experts see a retirement savings crisis on tap for so many Americans over the next several decades. But the advent of state-sponsored auto IRAs — individual retirement account programs that workers can be automatically enrolled in if their companies don’t have their own workplace plan in place — is helping to make a dent in that coverage gap. Auto IRAsare relatively new. The first one started in 2017, and now a total of 17 states have enacted their own, although only 10 are currently in effect, with a few others scheduled to come on line next year, per AARP. But, just based on data from eight states’ programs, more than 900,000 workers have already amassed savings of over $1.7 billion as of October, according to the Georgetown Center for Retirement Initiatives. And two new auto IRA analyses released this week — by the Pew Retirement Savings Project and by Gusto, a payroll and HR software provider for small and medium-sized businesses — found broad-based benefits, especially for low-to-middle-income earners, who are typically least likely to have access to workplace plans.

How auto IRAs work

The 17 states that have enacted auto IRAs to date are California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Minnesota, Nevada, New Jersey, New York, Oregon, Rhode Island, Vermont, Virginia and Washington. While they each have their own rules, they typically require employers to make a choice: Either offer their workforce access to the auto IRA or set up their own employer-sponsored plan, like a 401(k). Employers that opt to use the state’s auto IRA automatically enroll employees and withhold a pre-set savings rate — usually 5% — of a worker’s pay every pay period, according to John Scott, director of Pew’s Retirement Savings Project. Workers have the option to change the payroll contribution amount or opt out of the plan altogether. Auto IRAs are structured as Roth IRAs, according to Georgetown CRI — so savings contributions are made with after-tax dollars and the savings can grow and be withdrawn in retirement tax free. Employers are not allowed to make matching contributions to auto IRAs, but some participating workers may benefit from the federal saver’s tax credit or a new federal savers’ match coming into effect in 2027, Scott noted.

Auto IRAs boosting savings for those least likely to save

Noting that less than a third of workers in the bottom half of the income distribution own a retirement account, Gusto found that “workers in states with auto-enrollment IRA policies are 20% more likely to save for retirement.” It also found that auto-enrollment IRAs had effectively boosted the savings rate of low-to-middle income earners by 55%. “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 researchers wrote. Initial data also suggests that the introduction of auto IRAs might correlate with more employers offering their own plans. Pew found that in some states with auto IRAs more private sector plans have been introduced. “There is usually an increase in new plan formation when the state programs start or at major implementation deadline dates, as was the case with California in 2022,” researchers wrote. It’s not entirely clear why, since smaller businesses often cite cost and administrative burden as reasons why they don’t sponsor a retirement plan. But, Pew noted in its report, “The post-pandemic improvement in the economy may be helping as well as new incentives for employers from the 2019 passage of the SECURE 1.0 legislation, which made it easier and less expensive for small business owners to set up retirement plans for their employees.” It’s possible that, when pressed by their state to either offer the auto IRA or do their own plan, some businesses may have been spurred into action if they’d already been thinking about offering a 401(k) or other employer-sponsored option, Scott suggested. And that’s good both for the employer and the employees. A robust workplace savings plan can help attract and retain workers. And employer plans offer workers tax breaks and direct matching contributions, which can help them grow their nest eggs faster than they otherwise might.