Sturti | E+ | fake images
Whether you have access to a retirement plan through work increasingly depends, at least in part, on where you live.
In the past decade, 16 state legislatures have adopted retirement savings programs for workers whose employers do not offer a 401(k) plan or other similar option. Some programs are up and running, while others are in the planning stages.
Some also volunteer for companies to participate. But most require companies to offer their own 401(k) or facilitate automatic enrollment of their workers, who can opt out, into individual retirement accounts through the state’s so-called auto-IRA program.
More on Personal Finance:
3 Key Moves to Make Before Tax Season Begins
This is the best way to prepare for home repair expenses
The best way to pay off high-interest credit card debt
“On average, we’ve seen one or two new state programs enacted each year, and we expect that trend to continue in 2023,” said Angela Antonelli, executive director of Georgetown University’s Center for Retirement Initiatives.
“We should see program assets soon exceed $1 billion and more than 1 million savings accounts soon in 2023, and then continue to grow more rapidly as other states open,” Antonelli said.
This is what is in progress
Last year, Maryland and Connecticut launched their self-IRA programs, joining Oregon, California and Illinois. Colorado and Virginia are expected to do so this year. Others, including Delaware, New Jersey and New York, are still in the planning phases.
Overall, 46 states have taken steps since 2012 to implement a non-covered worker program, consider legislation to launch one or study their options, according to Antonelli’s organization.
Although there are some differences in the programs, they generally involve automatic enrollment of workers into a Roth IRA through a payroll deduction starting at around 3-5%, unless the worker opts out (about 28% to 30% do, Antonelli said). There is no cost to employers and the accounts are managed by an investment company.
Contributions to Roth accounts are not tax deductible, as they are with 401(k) plans or similar employment options. Traditional IRAs, whose contributions may be tax-deductible, are an alternative in some states, depending on the specifics of the program.
Among current auto-IRA programs, workers have accumulated more than $630 million among 610,000 accounts through 138,000 employers, according to the center.
Nearly 57 million lack access to a work plan
Of course, there is still a long way to go to reach all of the estimated 57 million workers who do not have access to an employer-based retirement account.
While you can set up an IRA outside of work, people are 15 times more likely to save if they can save through a workplace plan, according to AARP.
Large 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. That compares with 56% at companies with fewer than 100 workers.
Auto-IRA programs address that disparity: All but the smallest businesses—say, fewer than 10 workers or those that don’t use an automated payroll system—face the mandate to either participate in or offer their own plan.
Some businesses choose 401(k) over the state program
It seems some businesses are choosing a 401(k) instead: In the year after the launch of the first three auto-IRA programs: Oregon (2017), Illinois (2018), and California (2019), there was a rate of 35% higher growth. among new 401(k) plans at private companies in those states versus other states, according to recent research by the Pew Charitable Trusts.
“We’ve seen a growth in new 401(k) plans in states that have adopted automatic IRAs,” said John Scott, director of Pew’s retirement savings project. “A lot of employers say they’d rather have a 401(k), so in many ways I think state programs are pushing employers to offer 401(k) plans.”
Federal rules encourage companies to offer 401(k) plans
The changes at the federal level, enacted as part of the Security Act of 2019, are also intended to help small businesses offer 401(k) plans. Instead of sponsoring their own plan and assuming the administrative and fiduciary responsibilities that come with it, they can join a so-called joint employer plan with other companies, a kind of shared 401(k).
Legislation known as Secure 2.0, which was signed into law last month, includes provisions to further enhance the attractiveness of a joint plan.
“The idea is to try to fill the [access] gaps as much as possible,” Scott said.
While Congress so far seems reluctant to require companies to offer a 401(k), lawmakers 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.
Limitations on State Programs
There are limitations to state programs. For example, they don’t provide a matching contribution like many 401(k) plans do.
Contribution limits are also lower than in 401(k) plans. You can put up to $6,500 into a Roth IRA in 2023, though people with higher incomes are limited in how much they can contribute, if at all. In addition, anyone age 50 and over is allowed an additional $1,000 “catch up” contribution.
For 401(k) plans, the contribution limit is $22,500 in 2023, and the 50-and-over crowd allows an additional $7,500.
However, Roth IRAs, unlike traditional IRAs or 401(k) plans, also do not have penalties if you withdraw your contributions before age 59½. However, to withdraw winnings early, there may be a tax and/or penalty.
The programs are also born in part out of necessity. Essentially, states have recognized that doing nothing means risking further pressure on state-funded social services for retirees in financial distress.
“States took the initiative to start closing the access gap,” Antonelli said. “The cost of doing nothing is too great, with an estimated budget and fiscal impact of billions of dollars for many states over the next 20 years due to an aging population that will have little or nothing saved for retirement.”