More and more employers are automatically enrolling workers in pension plans. Here’s how it could help millions of Americans

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Growing support for Auto IRAs could be a lifeline for millions of workers saving for retirement.

Key points

  • Automatic IRAs automatically defer income to workers’ Individual Retirement Accounts.
  • Four states have implemented Auto IRA programs, and six more are underway.
  • Members of Congress debated a national agenda.

What is an automatic IRA?

An Auto Individual Retirement Account, or Auto IRA, is a retirement contribution plan available to workers without an employer plan in some states and cities. An Auto IRA is not a new type of retirement savings account, but rather a new way to encourage savings in already common IRAs.

Unlike 401(k), 403(b), and other employer-sponsored plans, IRAs are owned not by employers but by employees. This means that new employees are not subject to the eligibility criteria to start saving. Additionally, these accounts are in the hands of workers, who can direct portfolio investments, usually in a target date fund. When an employee with an IRA walks away from work, the full value of the account will go with them.

Although IRAs are nothing new, Auto IRA savings plans are something never seen before. In states with an Auto IRA program, companies above a specific number of employees (usually five to 10) must offer a retirement plan or enroll their employees in the state’s Auto IRA program. The employee is then eligible to defer compensation in their IRA from each paycheck. This “automatic” portion of automatic IRAs allows employees to save for retirement without having to think about it.

Another interesting feature of some state plans is that the savings are automatically invested, if not chosen otherwise. Since investing is an important part of saving for retirement, the provision allows participants to grow their savings.

Interested in opening an IRA? Check out the best IRA accounts for 2022.

Why are automatic IRAs important?

Automatic IRAs provide new savings opportunities for marginalized and non-traditional workers across the country. For the nearly 55 million workers who don’t have access to an employer-sponsored retirement plan, automatic IRAs are a new tool to increase retirement savings.

Experts believe that while income inequality is a big part of the racial wealth gap, employee benefits may also contribute. By making retirement savings more accessible, Auto IRAs are likely to have a positive impact on the financial well-being of many Americans.

With the rise of the gig economy comes an increase in the number of workers ineligible for pension plans. Many plans prohibit an employee working less than 500 hours per year from joining their employer’s pension plan, and 1,099 employees would also be affected when it comes to retirement planning. Automatic IRAs can open a new path to the financial well-being of these workers.

Where do automatic IRAs fall short?

Although IRAs are a valuable vehicle for individual retirement savings, they can be inefficient as stand-alone retirement savings vehicles.

A major drawback of IRAs are their relatively low contribution limits. Individuals can only contribute $6,000, plus a catch-up if they’re 50 or older, to their IRA each year. Compare that to the 401(k) limit of $20,500, plus a catch-up if you’re 50 or older. Saving early and often is important, but so is saving enough.

Another downside is taxation. In a traditional 401(k) plan, employee deferrals reduce taxable income. In many state Auto IRA programs, enrollees only receive an after-tax Roth IRA option. This means that while a worker’s savings will be tax-free in retirement, their taxable income today will be higher than if they had contributed to a traditional 401(k).

Since IRAs are privately owned, employers cannot make contributions. A traditional and safe 401(k) account requires a match of at least 4% of salary. Auto IRAs cannot have such a provision.

Learn more: How much do I need to retire comfortably?

Obtain state and federal support

State retirement programs became popular in 2017, with the launch of the nation’s first Auto IRA in Oregon. Since then, three additional states, California, Illinois and Connecticut have launched their own programs. They will be joined in the coming years by six other states and two cities, currently in various stages of implementation.

Currently, the following states are adopting an Auto IRA program:

  • California (active)
  • Colorado
  • Connecticut (active)
  • Illinois (active)
  • Maine
  • Maryland
  • New Jersey
  • New York
  • Oregon (active)
  • Virginia

Congressional support for a national Auto IRA program is uncertain. Members of the House Ways and Means Committee, including Chairman Richard Neal (D-MA), have shown support for an Auto IRA program. However, support for such a program seems to closely follow party lines.

Regardless of national success, Auto IRAs seem to be working. According to Georgetown University, three state Auto IRA programs have already facilitated more than $423 million in retirement savings.

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