State-run ‘auto IRAs’ gaining steam as a retirement savings solution

State legislators across the country are increasingly addressing the pension and savings gap.

Maine has become the latest jurisdiction to pass a law requiring most employers who do not offer a retirement plan to automatically enroll their workers in an individual retirement account through a state-run program. New York State legislature passed a law earlier this month that does the same, and New York City did so in May.

“Among all the state auto-IRA programs now adopted – to date 14 states – more than 20 million of the 57 million workers who lack access will have the opportunity to save,” said Angela Antonelli, executive director of Georgetown University’s Center for Pension Initiatives.

Since 2012, at least 45 states have either implemented or reviewed laws aimed at helping workers who do not have access to a retirement plan through work, according to the pension center.

Three states already have plans for auto-IRAs: Oregon, Illinois and California. While there are some minor differences between programs, the general idea is that employees are automatically enrolled through a payroll deduction (starting at about 3% or 5%), unless they choose to do so. Employers have no costs, and the accounts are managed by an investment company.

Several more states are expected to launch pilot testing of their own auto-IRA programs this year, including Maryland, Connecticut and Colorado, Antonelli said. In addition, Virginia lawmakers passed a law earlier this year approving such a plan.

Several other states – including Massachusetts, Vermont and Washington – have programs that work differently, with voluntary participation.

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Although large employers are more likely to offer retirement opportunities, costs and administrative burdens can get in the way of small business owners looking to set them up. Thus, these state programs can increase these workers ’access to the work plan.

It is not the only movement that strengthens the ranks of savers. The Security Act, passed in 2019, made it easier for small businesses to come together to offer their workers a 401 (k) plan through so-called unified employer plans. The idea is that companies can participate in the administrative and cost aspects of pension savings management.

“The more workers available, the better,” Antonelli said. “There is a huge [retirement savings] gap to fill. “

In addition, a pension bill pending in Congress employers should do certain freelancers qualify for 401 (k) of their companies. The state’s IRA car programs cover part-time workers, Antonelli said.

Workers seem to need all the help they can get. For example, the average account balance for individuals approaching retirement – those aged 55 to 64 – is $ 84,714, according to the latest Vanguard consequences As America reports, it is saving.

Part of the hurdle is access. While it is possible to open a retirement account outside of employment, individuals are 15 times more likely to save for their golden years if they can do so through a job plan, according to AARP, an advocacy group for older Americans. Add automatic registration and the outcome will be better: The overall average savings rate is up 56% (including employer contributions) among 401 (k) plans with automatic enrollment, a Vanguard survey shows.

In total, workers in these state programs have acquired more than $ 266 million in retirement assets, most of them in three states with auto-IRA arrangements in place and included, Antonelli said.

For example, through OregonSaves, which was first launched in 2017, over 100,000 worker accounts are invested with more than $ 100 million. The rejection rate is about 33%.

For workers who end up on one of these automatically enrolled accounts, it’s worth knowing how they work and how they differ from the 401 (k) plans that many companies already offer.

For starters, the money deducted from your salary – assuming you don’t check out – goes to a Roth IRA run by an investment company, not your state government. Contributions to Roth accounts cannot be deducted from taxes as is the case with plans 401 (k). (Traditional IRAs, whose contributions may be tax deductible, may be available as an alternative, depending on the specifics of the government program).

Meanwhile, Roth IRAs – unlike, in general, 401 (k) plans – also come unpunished if you withdraw your contributions before age 59.

This means that if you return any contribution before retirement, there is no penalty because you have already paid tax on them. (However, there may be a tax and / or penalty for earnings.) In other words, the account could more easily become an emergency fund, rather than being exclusively for retirement.

In addition, these Roth accounts will generally not have employer compliance with work contributions, as 401 (k) plans often have.

The annual limits on Roth IRA contributions are also lower. You can contribute $ 6,000 in 2021, although those who earn more have a limit on what they can contribute, if at all. Also, anyone over the age of 50 is allowed an additional contribution of $ 1,000.

For 401 (k) plans, the contribution limit is $ 19,500 in 2021, while a mass of 50 and over allowed an additional $ 6,500.