State-run IRA programs continue to grow as more options are launched

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Whether you have access to a retirement plan through work increasingly depends, at least in part, on where you live.

Over the past decade, 16 state legislatures have adopted retirement savings programs that target workers whose employers do not offer a 401(k) plan or a similar option. Some programs are in the works, while others are in the planning stages.

Some are also voluntary for companies to participate in. But most require companies to either file their own 401(k) or make it easy to automatically enroll their workers — who can opt out — into individual retirement accounts through what’s called a state IRA program.

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“On average, we have seen the enactment of one or two new state programs each year, and we expect this trend to continue in 2023,” said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University.

“We should see program assets soon exceed $1 billion, more than a million savings accounts soon in 2023, and then continue to grow more rapidly as other countries open,” Antonelli said.

Here’s what’s in the making

Last year, Maryland and Connecticut launched their own IRA programs, with Oregon, California and Illinois joining. Colorado and Virginia are expected to do so this year. Other states – including Delaware, New Jersey and New York – are still in the planning stages.

Overall, 46 states have taken action since 2012 to either implement a program for non-screened workers, consider legislation to launch one or study their options, according to Antonelli’s organization.

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Although there are some differences in the programs, they generally involve workers automatically enrolled in a Roth IRA through a payroll deduction that starts at about 3% or 5%, unless the worker chooses to move out (about 28% to 30% do, he said). Antonelli). There is no cost to the employers, and the accounts are managed by an investment firm.

Contributions to Roth accounts are not tax deductible, as are the case with 401(k) plans or similar workplace options. Traditional IRAs, contributions to which may be tax deductible, are an alternative in some states, depending on the specifics of the program.

Among existing Auto-IRA programs, workers have raised more than $630 million from 610,000 accounts through 138,000 employers, according to the center.

About 57 million people lack a workplace plan

Of course, there’s still a long way to go to reach all of the 57 million workers who lack access to an employer-based retirement account.

Although you can set up an IRA outside of work, people are 15 times more likely to save if they can do so with a workplace plan, according to the AARP.

Larger companies are more likely to offer 401(k) plans. Among employers with 500 or more employees, 90% offer a plan, according to the US Bureau of Labor Statistics. This compares to 56% in companies with fewer than 100 workers.

Automatic IRA programs address this disparity: All but the smallest companies—say, fewer than 10 workers or those that don’t use an automated payroll system—face a mandate to participate or offer their own plan.

Some companies opt for a 401(k) over the state program

Some companies seem to be opting for 401(k) instead: In the year since the launch of the first three auto-IRA programs—Oregon (2017), Illinois (2018), and California (2019)—there has been a 35% higher growth rate among 401 plans. (k) new shares in private companies in those states versus others, according to recent research from Pew Charitable Trusts.

“We’ve seen growth in new 401(k) plans in those states that have adopted auto-IRAs,” said John Scott, director of the Pew Retirement Savings Project. “A lot of employers say they’d rather have a 401(k), so I think state programs are urging employers to offer 401(k) plans in many ways.”

Federal rules encourage companies to file 401(k)s

The changes at the federal level, enacted as part of the Security Act of 2019, are intended to help small businesses file 401(k) plans. Instead of sponsoring their own plan and taking on the administrative and fiduciary responsibilities that come with that, they can join what’s called an employer’s plan bundled with other companies—a kind of shared 401(k).

The legislation known as Secure 2.0, which was enacted last month, includes provisions to further enhance the attractiveness of the bundled plan.

The idea is to try to fill in [access] as many gaps as possible,” Scott said.

While Congress has so far seemed loath to require companies to file 401(k)s, lawmakers have included a mandate in Secure 2.0: 401(k) plans will have to automatically enroll their employees. However, it excludes existing plans, companies with 10 or fewer workers, and companies less than three years old.

restrictions on state programs

There are limitations to state programs. For example, they don’t make a matching contribution as many 401(k) plans do.

Contribution limits are also lower than in 401(k) plans. You can put up to $6,500 in a Roth IRA in 2023, though higher earners are limited in what they can contribute, if applicable. Also, anyone age 50 or older is allowed to make an additional $1,000 “offset” contribution.

For 401(k) plans, the contribution limit is $22,500 in 2023, with the 50+ crowd allowed for an additional $7,500.

However, Roth IRAs — unlike traditional IRAs or 401(k) plans — also come without any penalty if you withdraw your contributions before age 59½. For early withdrawal of profits, there may be a tax and/or penalty.

Software is also supported partly out of necessity. Essentially, states have realized that doing nothing means risking increasing pressure on state-funded social services for financially struggling retirees.

“Countries are taking the lead to start closing the access gap,” Antonelli said. “The cost of doing nothing is prohibitively high, with billions of dollars in the discretionary budget and financial implications for many states over the next 20 years due to an aging population that will have little or nothing saved for retirement.”

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