Retirement Savings Gap for US Workers
Over 50 million private sector employees in the US don’t have access to retirement savings options like 401(k) plans.
However, there’s a shift happening. An increasing number of states are mandating that private employers provide “automatic IRAs” if they don’t have their own workplace plans. This means every employee gets an individual retirement account, with contributions automatically deducted from their paychecks.
Oregon led the way in this initiative. Currently, 15 states have operational automatic IRA programs, with two more in the pipeline. Also, eight other states are considering similar legislation this year.
Current Status of Automatic IRAs
- States with automatic IRA programs: California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Minnesota, Nevada, New Jersey, New York, Oregon, Rhode Island, Vermont, and Virginia. Hawaii plans to launch its program later this year, while Washington is set to start in 2027.
- States where auto IRA bills are being considered: Alabama, Indiana, Kansas, Massachusetts, Michigan, Pennsylvania, Tennessee, West Virginia.
As of January 31, about 1.2 million automatic IRA accounts had attracted $2.79 billion in contributions, according to recent data. This figure reflects assets from 12 state programs, though three programs established recently are not included.
New York is among those recent entrants. Their plan, launched in October, requires employers with 30 or more employees to register by March 18, with later deadlines for smaller businesses. Specifically, companies with 15 to 29 employees must comply by May 15, while those with 10 to 14 must meet the deadline of July 15.
It’s worth noting that businesses with fewer than 10 employees or those operating for less than two years are exempt from these requirements. Some states have even stricter exemptions, like those for firms with five or fewer employees, as explained by Kim Olson, a senior retirement planning officer at Pew.
An automatic IRA functions as a Roth IRA, funded with after-tax income and offering tax-free growth. Employers deduct a portion of employees’ salaries—usually around 3% or 5%—and invest that in a fund geared toward the employee’s expected retirement date.
Contributions typically increase by 1% annually until they reach between 8% and 10%. Employees have the option to adjust their contribution rates or opt out altogether, depending on state laws.
Additionally, it generally costs employers nothing to enroll workers in these plans, and there’s no requirement to match contributions. Responsibility for selecting low-cost investment options lies with the state board overseeing the program, alleviating employers from that duty, Olson noted.
From 2027 onward, workers may become eligible for federal benefits under a Saver’s Match, which could provide up to $1,000 a year. This would contribute directly to their Roth IRAs, effectively boosting their retirement savings.
The Saver’s Match will replace the current non-refundable tax credit for low- and moderate-income workers saving in workplace plans or IRAs. While tax credits reduce tax liability, they do not directly add to a savings account, which limits their utility for low-income workers who may owe little in taxes.
Saving for retirement is challenging for many, especially since pensions are rare in the private sector. Simply mandating an automatic IRA won’t completely resolve retirement issues, but it can provide a significant benefit for participants.
Olson emphasizes the importance of these savings. Predictably, consistent contributions over several years could allow lower-income workers to delay Social Security benefits, possibly increasing their monthly checks for life.
“Is this enough for a fully secure retirement? No,” Olson posits. “But it’s a way to encourage people to start investing.”
