For many Americans, retirement savings begins with joining a plan offered by their employer, especially one that automatically joins with payroll deductions.
The problem: Nearly half of US private sector workers, or about 57 million people, do not have access to an employer-provided pension such as a 401(k). However, aid may be on the horizon in at least some states.
“Unfortunately, workers often do not act when they do not have access to plans provided by their employers,” said Angela M. Antonelli, executive director of the association. Georgetown University Retirement Initiative Centertold Yahoo Finance. “Only 5% of workers go through the process of opening a retirement savings account if their employer does not provide it. If workers have access to plans provided by their employer, participation rates jump to 72%,” she said.
In recent years, more states have enacted legislation to solve this retirement savings problem. And the new law appears to be spurring more employers to choose to offer 401(k) plans instead of participating in state programs. working paper It is an award from the National Bureau of Economic Research (NBER).
As of June, 19 states Established a retirement allowance system For private sector workers. Fifteen of these states have automatic IRA programs. It requires most private employers that do not sponsor their own savings plans to enroll their workers in state-sponsored Individual Retirement Accounts (IRAs) at a preset savings rate (usually 3% to 5% of their income). automatically deducted from your salary. The plan typically increases the employee’s contribution by 1% each year until it reaches 10% of his contribution unless the employee opts out.
NBER researchers used the U.S. Census on State Resident Behavior and retirement planning reports submitted by employers to the federal government to examine the indirect effects of automated IRAs in the three states with the longest-running programs (California, Oregon, and Illinois).
Findings: According to the paper, the program increased the odds of workers in those states being employed by companies that offer their own retirement plans by 3.2%, and employees’ odds of participating in those employer plans by 7%.
Increase in employer-sponsored retirement plans linked to national policies
“Our findings provide fairly strong evidence that policies in these states in California, Oregon, and Illinois have led to a significant increase in the prevalence of employer-sponsored retirement plans (ESRPs), the likelihood of workers working for employers that offer such plans, and the likelihood of workers participating in available plans,” Adam Bloomfield, a senior economic policy adviser to the Federal Deposit Insurance Corporation and one of the paper’s fellows, told Yahoo Finance.
In fact, any noticeable increase in coverage in the early stages of policy development can be viewed by many as a substantial increase. And perhaps more importantly, “it was not clear whether these policies would lead to a net increase in worker enrollment through employer-sponsored schemes,” Bloomfield added.
Previous research supports this finding that national programs encourage employers to present their own plans.
The first three automated IRA programs were launched in Oregon (2017), Illinois (2018), and California (2019). In both cases, the 2022 study found private sector new 401(k) plan growth was 35% higher than other states the following year. report From The Pew Charitable Trust.
Here’s some background: New state law requires employers to provide workers with employer-sponsored retirement plans or to facilitate automatic payroll deductions that are credited to individual retirement accounts (IRAs) established for workers by the state.
9 of them program California, Colorado, Connecticut, Illinois, Maryland, Massachusetts, Oregon, Virginia, and Washington are now open to all eligible employers and workers.
Antonelli said many of the recently enacted programs (New York, New Jersey, Maine, Delaware and Hawaii) and many of the new automatic IRA programs in 2023 (Nevada, Minnesota and Vermont (and Missouri’s voluntary lawmakers)) are likely to start within the next two years, 2024 and 2025.
How automatic IRA plans work
Bottom line: Employee contributions are generally directed to the Roth IRA. Contributions to a Roth account are not tax deductible, unlike 401(k) plans and similar employer-sponsored retirement plans. However, depending on plan details, a traditional IRA, where contributions are tax deductible, is also an option in some states.
These programs are overseen by state-appointed committees and administered by private financial companies. Since Roth’s contributions come from his after-tax wages, retirement withdrawals are tax-free. Employers are not required to make matching contributions.
You will see a list of options for investing your contributions. They are typically target date funds or stock, bond and income funds that adjust their mix of investments to match their expected retirement date.
As with most employer-offered plans, there is an administration fee for enrolled workers. For the current program, that fee ranges from up to $30 per year, or approximately 0.25% to 1% of account assets.
Employers who ignore their mandate to register their workers with the state plan are likely to be fined. For example, in California, each eligible employer did not allow eligible employees to participate without good reason. Calsavers Pay a fine of $250 per covered employee within three months. We will also pay an additional fine of $500 per affected employee for delays beyond 180 days.
So far, the response from workers across the board has been encouraging. As of June 30, 156,804 employers and nearly 700,000 savers were using state programs, according to Antonelli, just five of 19 state programs (California, Illinois, Oregon, Connecticut and Maryland).
“The program shows that if workers are given the opportunity to save, many will save,” she said. “But the options for employers need to be simple and low-cost, and this is what national programs offer.”
If early progress is any indication, Antonelli expects millions of workers to be covered by the national program over the next three to five years. “At the same time, the private sector can also be expected to contribute to increased coverage and participation, but it is too early to judge to what extent,” she said.
And we have new incentives. Starting this year, eligible companies with he 50 or fewer employees will equal credit Subsidize 100% of the administrative costs of establishing a workplace retirement plan. On the other hand, with many small employers struggling to attract and retain employees, and in a tight labor market, severance pay is an attractive lure.
“The goal is to close the access gap,” added Antonelli.
Kelly Hannon is a senior reporter and columnist at Yahoo Finance. She is a workplace futurist, a strategist for her career and her retirement, and the author of her 14 books, including “.Control Even Over 50: How To Succeed In The New World Of Work” And “Don’t be too old to get rich”. follow her on her twitter @Kelly Hannon.