A look at the state-run auto-IRA plans and whether they are a net benefit for employees who don’t have (or utilize) other retirement options.
Not everyone has access to a workplace-retirement account like a 401(k).
A few years ago, I was in that situation. The founder of the company didn’t believe in retirement accounts, and instead believed that everyone should invest in…well, I won’t go there.
I would certainly have invested in a 401(k) if I could have (and later, the company relented and offered one, and I signed right up).
Smaller businesses have a bigger issue: capacity. If you have 10 employees, is it really within your scope to be able to set up a workplace retirement plan? Probably not.
Luckily states have stepped in, and created something called the “auto-IRA”.
This plan is novel, probably inadequate, but much better than nothing.
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The auto-IRA
The auto-IRA is a system put in place by certain states to mandate certain employers to offer automatic IRA enrollments to their workers. While this is mandated, the cost to the employer is typically free.
What’s most interesting about this setup is that the plans are opt-out, not opt-in, meaning that employees will automatically be enrolled in the IRA plan.
One account puts the average deduction from a paycheck at 5 percent. And it should be noted that this is typically after-tax money (and a Roth IRA).
Employees are not locked into these plans of course. They can opt-out at any time, and with a Roth IRA, they can even withdraw the contributions (though not the earnings) without penalties, just like a normal Roth IRA.
Inadequate but not fatal
This sounds like an unalloyed good. 35% of Americans don’t have access to a workplace plan, and probably millions more don’t have an IRA, so anything that gets people saving for retirement is a very good thing.
However, it should be noted that by automatically enrolling employees, it means that the plan administrators make decisions for where the money is invested. Another study from SHRM noted that in Oregon, the automatic investment was so conservative that it only returned 1.52 percent.
That is not nearly enough.
And of course, an IRA has much lower contribution limits than a 401(k), about three times lower depending on your circumstances, so you can put more money away in tax-advantaged circumstances with a 401(k).
All of these criticisms are legit, if a little misplaced. Auto-IRAs aren’t a panacea, but they do indeed start the process of investing for many people who wouldn’t otherwise start investing.
And these people, once started, may be more likely to continue investing once they’ve started.
So I think they are a great, if inadequate solution to the much bigger problem of people not saving up enough for a retirement.
But would you opt-out?
I started this post by asking whether you’d opt out if someone automatically enrolled you in an auto-IRA.
And, statistically speaking, the answer is: no.
A 2017 report from the Pew Charitable Trust found that only 13 percent of respondents would opt-out of an IRA if they were automatically auto-enrolled.
So we have an interesting point of financial inertia here: there are many people who would never sign up for an IRA themselves, but if one was automatically provided for them, they would use it.
To me, this is essentially the best possible role of government: to incentivize beneficial behavior.
And it’s not about the nanny state: A resident of the U.S. that has saved more money will be less of a burden on the state’s resource, thus leaving more resources for others. It’s a win-win.
Now, obviously, as this article from NerdWallet rather cheekily points out, you can set up your own auto-IRA. But duh. The whole point about an IRA is that you don’t need anyone’s permission to start one up. Go to Vanguard, follow the steps, and almost immediately, you’ll be set up.
But people aren’t doing that. So a push to get them to do something that will benefit them later is a good push indeed.
Bonus: A list of all state-run auto-IRA plans
I wasn’t able to find a list of all the states and their plans anywhere, so I made one here. (This list may be out of date, so leave a comment below if there’s info that needs to be added.)
- Alabama
- Alaska
- Arizona
- Arkansas
- California: CalSavers
- Colorado
- Connecticut
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois: Illinois Secure Choice
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland: MarylandSaves
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon: OregonSaves
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont: Green Mountain Secure Retirement Plan
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
