Where businesses must offer employees a retirement plan
Seventeen states now require that private-sector employers enroll their workers in an "auto IRA" if the business doesn't already provide a workplace retirement savings plan.
(CNN) — More than 50 million US private-sector employees don’t have access to a workplace retirement savings plan like a 401(k).
But a growing number of states are now requiring most private-sector employers to provide what are known as “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 first in 2017. Today, a total of 15 states have an active auto-IRA program, and two others are in the process of implementing theirs, according to the Pew Charitable Trusts. Plus, eight states are weighing legislation this year to create their own auto-IRA programs.
There is now $2.79 billion in nearly 1.2 million funded auto IRA accounts as of January 31, according to the latest data from the Georgetown Center for Retirement Initiatives. That counts assets across 12 state programs; it does not include the three states that opened programs in the past several months.
New York’s new plan
New York is one of those three states. Its plan opened in October. Employers have until March 18 to register if they have 30 or more employees; until May 15 if they have 15 to 29; or July 15 if they employ 10 to 14 people.
The only employers exempt from New York’s mandate are those with fewer than 10 employees or those that have been in business less than two years. Several other states have tighter exemptions, such as businesses with five or fewer employees, according to Kim Olson, Pew’s senior officer for retirement planning.
How an auto IRA typically works
State-based auto IRAs are Roth IRAs. The accounts are funded with after-tax money, which then compounds tax free.
Employers automatically deduct a small portion of your paycheck — usually 3% or 5% — and invest it in, most typically, a target-date fund based on your anticipated year of retirement.
Employers then automatically increase your contributions by 1% of your pay a year until the contributions reach between 8% and 10%, depending on state rules. You also may choose to increase or decrease your contributions yourself (or even opt out).
There is usually no cost to employers to enroll their workers in the plan, and matching employer contributions are not permitted in Roth IRAs. Employers also don’t assume fiduciary duty — meaning they don’t have to worry about selecting solid, low-cost investments and making other decisions in the best interest of plan participants. That duty usually resides with a state board overseeing the program, Olson said.
But starting in 2027, workers may qualify for a federal Saver’s Match worth up to $1,000 a year. That match — equal to half of your retirement contributions up to $2,000 — will be deposited directly into your Roth IRA.
The Saver’s Match replaces a current non-refundable tax credit for low- and moderate-income workers who save for retirement in a workplace plan or IRA. Tax credits reduce a person’s tax liability dollar for dollar but don’t directly add to savings accounts. And, because the current savings tax credit is non-refundable, it may not help lower-income workers who don’t have much, if any, income tax liability.
A start, not a panacea
It’s hard for most people to save enough for retirement without also getting a pension from their job — and most private sector employees will not get one.
Auto IRA mandates won’t solve retirement insecurity. But they can give those who participate a leg up.
For one thing, Olson noted, it provides savings a person wouldn’t have otherwise. If low- and moderate-income workers can consistently contribute to an auto IRA over the years, it may grow to a point where it allows the worker to take Social Security a little later than planned. And that can increase their monthly benefit check for the rest of their lives.
“Will it be enough (for a fully secure retirement)? No,” Olson said. “But this is a way to get people in the door to start investing.”
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