A significant portion of American workers, nearly 57 million people in the private sector, lack access to a retirement savings plan through their employers. According to AARP, this shortfall arises because many companies do not offer retirement plans, or employees do not qualify for the existing options. The absence of employer-sponsored retirement plans underscores a looming savings crisis that could affect millions over the coming decades.
To address this gap, state-sponsored auto IRAs have emerged as a promising alternative. These individual retirement account programs automatically enroll workers if their employers do not provide their own workplace retirement plans. Since their introduction in 2017, auto IRAs have been implemented in 10 states, with a total of 17 states having enacted legislation to adopt them. The program is scheduled to expand further in the coming years.
Data from the Georgetown Center for Retirement Initiatives highlights the impact of these programs. As of October, eight states have facilitated over $1.7 billion in retirement savings for more than 900,000 workers. These savings programs have been particularly beneficial for low- and middle-income earners, who historically are the least likely to have access to employer-sponsored retirement plans. Reports from the Pew Retirement Savings Project and Gusto, a payroll and HR software provider, reveal that auto IRAs are effectively bridging the savings gap, offering broad-based benefits to underserved workers.
Auto IRAs operate with a straightforward framework. Employers in participating states must either establish their own retirement savings plans, such as 401(k)s, or enroll their employees in the state’s auto IRA program. Under the auto IRA system, employees are automatically enrolled, with a default savings rate typically set at 5% of their pay. However, employees have the flexibility to adjust their contribution levels or opt out entirely.
These accounts are structured as Roth IRAs, meaning contributions are made with after-tax income. Workers can enjoy tax-free growth on their savings, which can be withdrawn tax-free in retirement. While employers are not required to make matching contributions, participating employees may benefit from federal programs like the saver’s tax credit or the upcoming federal saver’s match set to begin in 2027.
The introduction of auto IRAs has significantly boosted retirement savings rates among low- to middle-income workers. Research by Gusto shows that workers in states with auto IRA programs are 20% more likely to save for retirement than their counterparts in states without such programs. For workers earning median incomes or less, the savings rate increased from 2.2% to 3.4%, translating into an additional $150 per month in retirement income. This improvement demonstrates how auto IRAs empower individuals who otherwise might not have set aside funds for their retirement years.
Beyond the direct benefits to workers, auto IRAs appear to have a broader influence on employer behavior. Pew’s analysis found that states implementing auto IRAs experienced a rise in the formation of private-sector retirement plans. For example, in California, the rollout of its auto IRA program in 2022 coincided with a notable increase in new workplace plan offerings. This trend may be driven by businesses seeking to attract and retain talent, as employer-sponsored plans often include features such as tax benefits and matching contributions, which make them appealing to both employers and employees.
The reasons for this trend are varied. Smaller businesses, which frequently cite costs and administrative burdens as obstacles to offering retirement plans, might find the auto IRA’s streamlined process a motivating factor. Additionally, federal incentives such as the SECURE Act of 2019 have made it easier and more affordable for small businesses to establish their own plans. These factors, combined with economic recovery following the pandemic, likely play a role in the increasing prevalence of employer-sponsored options.
Ultimately, the growth of auto IRAs and their complementary impact on traditional workplace retirement plans represent a significant step forward in addressing America’s retirement savings crisis. By providing workers with accessible and straightforward savings mechanisms, these programs are helping to secure financial stability for millions of Americans, especially those who might otherwise be left behind in retirement planning. The continued expansion of auto IRAs and related initiatives holds the potential to transform the retirement landscape, ensuring that more workers can approach their later years with confidence and security.
