Are state auto-IRAs the answer to the retirement savings gap?

Are state auto-IRAs the answer to the retirement savings gap?


One question on most people’s minds these days (or at least it should be) is whether or not they will have enough money saved for their retirement. The next question naturally becomes, “How can I be retirement-ready when the time comes?” For those still working, access to employer-sponsored retirement savings plans can help set them on the right path. But recent statistics show that 34 percent of working adults don’t have any retirement savings [1]. None. Zero. Zilch. Unless there’s a drastic change, this leaves millions of retiring Americans relying solely on just their Social Security income.

In 2016, the Obama administration passed a regulation that made it possible for states, and even some larger cities, to create their own retirement savings vehicles for private-sector employees to contribute to. These retirement accounts are exempt from federal retirement law—the Employee Retirement Income Security Act (ERISA). The expectation is that the 34 percent of households that are not currently contributing to a retirement savings plan will now be able to save. The state auto-IRA solution is a bare-bones approach with very few options available to employers and employees, so while it’s a good start, it may not be the best option for many businesses.

 What’s next for state auto-IRAs?

In January 2017, a report cautioned that “well-intentioned states considering the mandating payroll deduction IRAs are likely to hurt the very workers they are helping” [2]. Another study by the U.S. Chamber of Commerce noted that the amount employees can personally contribute to a state auto-IRA is about one-third of what is allowed in a 401(k) and employers will not be allowed to contribute—which could lead to fewer plans being started, existing small plans being terminated, and important worker protections being lost.

Then in February 2017, the House introduced resolutions of disapproval to roll back the regulatory “safe harbor” for city/state IRA programs created under the Obama administration, and shortly after, the Senate chimed in introducing identical resolutions to undo the regulations. These resolutions fell within the time frame for repeal under the Congressional Review Act (CRA)—meaning that the “passage required just a simple majority vote” [3].

So where do we stand current-day? Well, Congress repealed the Obama-era rule in May of 2017, but that didn’t prevent states from moving forward with new legislation. Since then, at least 22 states and cities have introduced legislation to address the retirement savings gap among private sector workers [3]. In addition, ten states have already enacted these laws, including California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New York, Oregon, Vermont, and Washington.

Retirement savings options other than state auto-IRAs

With so much conversation surrounding the pros and cons of state auto-IRAs, many American workers may be wondering what other retirement savings options are available. By and large one of the most popular retirement savings vehicles today, 401(k) plans hold roughly $5.3 trillion in assets and cover more than 50 million people [4].

But what are the biggest differences between a 401(k) plan and a state auto-IRA? For starters, plan participants can contribute roughly three times more per year into a 401(k) than they can a state auto-IRA. Plus, many employer-sponsored 401(k) accounts also receive matching funds from the employer for employee contributions, though not every plan sponsor offers a match.

Ultimately, any retirement savings vehicle is better than none. And getting those who have access to a retirement plan to even start saving is a whole different story. But giving American employees more options to begin preparing for their financial future will help close the retirement savings gap and put many workers on the path to retirement readiness.