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State lawmakers across the country are increasingly addressing the retirement provision gap.
Maine is the latest jurisdiction to enact law requiring most non-retirement employers to automatically enroll their employees into an individual retirement account through a government-administered program. New York state legislature passed a bill earlier this month that does the same, and New York City did so in May.
“Of all the state auto-IRA programs that have been passed – 14 states so far – more than 20 million of the 57 million inaccessible workers have the opportunity to save,” said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University .
As of 2012, according to the Pension Center, at least 45 states have implemented or considered laws designed to help workers with their work without access to a pension plan.
Three states already have auto-IRA plans underway: Oregon, Illinois, and California. Although there are some minor differences between the programs, the general idea is that employees are automatically enrolled through a wage deduction (from around 3% or 5%) unless they quit. There are no costs to employers and the accounts are operated by an investment company.
Several more states are expected to start pilot tests for their own auto-IRA programs this year, including Maryland, Connecticut and Colorado, Antonelli said. In addition, Virginia lawmakers passed a bill earlier this year approving such a plan.
A handful of other states – including Massachusetts, Vermont, and Washington – have programs that work differently, with volunteer participation.
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While large employers are more likely to offer a retirement option, the cost and administrative burden of starting small businesses can stand in the way. Thus, these government programs can improve access to a workplace plan for these workers.
It isn’t the only movement ongoing to strengthen the ranks of retirement savers. The Secure Act, passed in 2019, made it easier for small businesses to band together to offer their workers a 401 (k) plan through what are known as pooled employer plans. The idea is that companies can participate in the administrative and cost aspects of running a retirement plan.
“The more options workers have, the better,” said Antonelli. “There is a huge one [retirement savings] To fill the void. “
Additionally, pending pension legislation in Congress would require employers to question certain part-time workers for their company’s 401 (k). The state’s auto-IRA programs cover part-time workers, Antonelli said.
The workers seem to need all the help they can get. According to Vanguard’s latest How America Saves report, the average bank balance for those nearing retirement ages 55 to 64 is $ 84,714.
Part of the hurdle is access. While it is possible to set up a retirement account outside of work, individuals are 15 times more likely to save for their golden years when they can do so through a workplace plan, according to AARP, the advocacy group for older Americans. Add auto-enrollment and the result is better: the average overall savings rate is 56% higher (including employer contributions) on 401 (k) plans with auto-enrollment, according to Vanguard studies.
The more options there are available to workers, the better. There is a huge one [retirement savings] To fill the void.
Executive Director of the Center for Retirement Initiatives at Georgetown University
In total, workers in these state programs have amassed more than $ 266 million in retirement assets, the majority of which are in the three states that have auto-IRA agreements in place, Antonelli said.
For example, OregonSaves, which was first introduced in 2017, is investing more than $ 100 million through 100,000 employee accounts. The opt-out rate is around 33%.
For employees ending up in one of these auto-enrolled accounts, it pays to know how they work and how they differ from 401 (k) plans that many companies already offer.
First of all, unless you opt out, the money that is withdrawn from your paycheck goes to a Roth IRA managed by an investment company, not your state government. As with 401 (k) plans, contributions to Roth accounts are not tax deductible. (Traditional IRAs, whose contributions can be tax deductible, may be available as an alternative option depending on the specifics of the state program).
Meanwhile, Roth IRAs – unlike 401 (k) plans in general – also come without penalty if you withdraw your contributions before the age of 59½.
This means that if contributions are withdrawn before retirement, there is no penalty because you have already paid tax on them. (However, there might be a tax and / or penalty on earnings.) In other words, the account could more easily become an emergency fund rather than solely for retirement.
In addition, these Roth accounts generally do not have employer match for labor contributions, as is often the case with 401 (k) plans.
The annual Roth IRA contribution limits are also lower. You can contribute $ 6,000 in 2021, though higher earning individuals have limited, if any, contributions. In addition, anyone aged 50 or older is granted an additional $ 1,000 “catch-up” contribution.
For 401 (k) plans, the contribution limit in 2021 is $ 19,500, with an additional $ 6,500 allowed for those over 50.