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Whether you have access to a pension plan through work increasingly depends, at least in part, on where you live.
Over the past decade, 16 state legislatures have enacted retirement savings plans aimed at workers whose employers do not offer a 401(k) plan or similar option. Some programs are in place and others are in the planning stages.
Some also volunteer for businesses to participate. But many require companies to either offer their own 401(k) or make it easy for their employees, who may opt out, to automatically enroll in individual retirement accounts through the state’s so-called auto-IRA program.
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“On average, we’ve seen one to two new state plans each year, and we expect that trend to continue in 2023,” said Angela Antonelli, executive director of Georgetown University’s Center for Retirement Initiatives.
“We should see program assets soon surpass $1 billion, and soon over 1 million savings accounts as soon as 2023, and then continue to grow even faster as other states open,” Antonelli said.
Here’s what’s planned
Last year, Maryland and Connecticut launched their own auto-IRA programs, joining Oregon, California and Illinois. Colorado and Virginia are expected to do so this year. Others, including Delaware, New Jersey and New York, are still in the planning stages.
In all, 46 states have taken steps since 2012 to either implement a program for uncovered workers, consider legislation to start one, or explore options, according to Antonelli’s organization.
Although there is some variation among plans, they typically include automatic enrollment of employees in Roth IRAs with payroll deductions starting at about 3% or 5% if the employee opts out (about 28% to 30% do said Antonelli). . There is no cost to employers and the accounts are managed by the investment firm.
Contributions to Roth accounts are not tax deductible as they are with 401(k) plans or similar workplace options. Traditional IRAs, whose contributions can be tax-deductible, are an alternative in some states, depending on the specifics of the plan.
Among current auto-IRA programs, workers have accumulated more than $630 million in 610,000 accounts through 138,000 employers, according to the center.
About 57 million do not have access to a workplace plan
Of course, there’s still a long way to go to reach all of the estimated 57 million workers who don’t have access to an employer-based retirement account.
While you can set up an IRA outside of employment, people are 15 times more likely to save if they can do so through a workplace plan, according to AARP.
Larger companies are more likely to offer 401(k) plans. Among employers with 500 or more employees, 90% offer a plan, according to the US Bureau of Labor Statistics. That compares with 56% for companies with fewer than 100 employees.
Auto-IRA programs address that disparity. all but the smallest companies, such as those with fewer than 10 employees or those that do not use an automated payroll system, are required to participate or offer their own plan.
Some companies choose a 401(k) instead of a state plan.
It looks like some companies are opting for a 401(k) instead. Within a year of launching the first three auto-IRA programs in Oregon (2017), Illinois (2018), and California (2019), growth was 35% higher. Among new 401(k) plans in private businesses in those states versus other states, according to a recent survey by the Pew Charitable Trusts.
“We’ve seen an increase in new 401(k) plans in states that have adopted auto-IRAs,” said John Scott, director of Pew’s Retirement Savings Project. “A lot of employers say they prefer to have a 401(k), so in many ways I think government programs are pushing employers to offer 401(k) plans.”
Federal rules encourage businesses to offer 401(k)
Changes at the federal level, passed as part of the SAFE Act of 2019, also aim to help small businesses offer 401(k) plans. Instead of sponsoring their own plan and taking on the administrative and fiduciary responsibilities that go with it, they can join a so-called employer pooled plan with other businesses, a kind of shared 401(k).
The legislation, known as Secure 2.0, which passed last month, includes provisions further increasing the appeal of the bundled program.
“The idea is to try to fill in [access] as many gaps as possible,” said Scott.
While Congress has so far been loathe to require companies to offer 401(k), lawmakers have included a mandate in Secure 2.0; 401(k) plans must automatically enroll their employees. However, it excludes existing programs, businesses with 10 or fewer employees, and companies less than three years old.
Limitations of state programs
There are limitations in state programs. For example, they don’t provide a matching contribution like many 401(k) plans do.
Investment limits are also lower than in 401(k) plans. You can put up to $6,500 into a Roth IRA in 2023, although higher earners are limited in what they can contribute, if at all. Additionally, anyone age 50 or older is allowed an additional $1,000 in “catch-up” contributions.
The contribution limit for 401(k) plans is $22,500 in 2023, and the 50-and-over crowd is allowed an additional $7,500.
However, Roth IRAs, unlike traditional IRAs or 401(k) plans, are also not penalized if you withdraw your contributions before age 59½. However, there may be a tax and/or penalty for early withdrawals.
Programs are also partly born out of necessity. In essence, states have accepted that doing nothing means putting pressure on publicly funded social services for retirees with financial difficulties.
“States have taken priority to begin closing the access gap,” Antonelli said. “The costs of doing nothing are too high, with a significant multibillion-dollar budget and fiscal impact for many states over the next 20 years due to an aging population that has little or nothing to save for retirement.”