State-Run Retirement Programs to Reach $1 Billion in Savings in 2023

The availability of a retirement plan through one's place of employment is becoming more and more dependent on the geographical location of the individual.
In the past ten years, sixteen state governments have implemented retirement-savings plans that are specifically designed for employees who do not have access to a 401(k) or similar retirement plan. Some of these programs are already in effect, while others are still in the process of being established.

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Businesses may choose to participate in certain retirement programs voluntarily. However, many of these programs necessitate that companies either provide their own 401(k) or facilitate the automatic enrollment of their employees in individual retirement accounts through the state's auto-IRA program. Employees have the option to opt out of this enrollment.

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Angela Antonelli, executive director of Georgetown University’s Center for Retirement Initiatives, noted that there has been an average of one to two new state programs enacted annually and that this trend is likely to continue in 2023.

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Antonelli predicted that the program's assets will surpass $1 billion and the number of saver accounts will reach 1 million by 2023. He also believes that the growth will accelerate as other states join in.
In the past year, Maryland and Connecticut have implemented their own auto-IRA programs, joining Oregon, California, and Illinois. Colorado and Virginia are anticipated to follow suit in the coming year. Meanwhile, Delaware, New Jersey, and New York are still in the process of formulating their own plans.

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Since 2012, Antonelli's organization has reported that 46 states have taken action to either create a program for those without coverage, contemplate legislation to initiate one, or investigate their options.
Though there are some distinctions between the programs, they usually involve enrolling employees in a Roth IRA through a payroll deduction of around 3% or 5%, unless the worker chooses to opt out (around 28% to 30% do so, according to Antonelli). Employers do not incur any costs, and the accounts are managed by an investment firm.

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Unlike 401(k) plans or other workplace options, contributions to Roth accounts are not tax-deductible. Traditional IRAs may be a viable option for some, as their contributions may be tax-deductible, depending on the program's specifics in the state.
The Center has reported that over $630 million has been saved in 610,000 accounts from 138,000 employers through the use of auto-IRA programs.

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It is clear that there is still a lot of progress to be made in order to provide retirement accounts to the estimated 57 million workers who do not have access to an employer-based retirement plan.
AARP has found that individuals are 15 times more likely to save for retirement if they can do so through a workplace plan, as opposed to setting up an IRA on their own.
The U.S. Bureau of Labor Statistics reports that 90% of employers with 500 or more employees offer a 401(k) plan, while only 56% of companies with fewer than 100 workers provide such a plan.

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Auto-IRA programs are designed to address the disparity between small and large businesses when it comes to retirement savings. Companies with fewer than 10 employees or those that don't use an automated payroll system are exempt from the mandate to participate or offer their own plan.
Recent research from Pew Charitable Trusts has revealed that in the year following the launch of the first three auto-IRA programs in Oregon (2017), Illinois (2018), and California (2019), the growth rate of new 401(k) plans at private businesses in those states was 35% higher than in other states. It appears that some companies are opting for a 401(k) instead.

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John Scott, director of Pew's retirement savings project, noted that there has been an increase in 401(k) plans in states that have adopted auto-IRAs. He went on to say that many employers are opting for 401(k) plans instead, suggesting that the state programs are encouraging employers to offer them.
The federal government has implemented changes as part of the 2019 Secure Act to assist small businesses in providing 401(k) plans. Rather than taking on the responsibility of creating and managing their own plan, they can join a pooled employer plan with other businesses, which is essentially a shared 401(k).

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Last month, a law called Secure 2.0 was passed, containing measures to make pooled plans even more attractive.
Scott suggested that it is important to do all that can be done to bridge any access gaps.
Congress has been hesitant to make it mandatory for companies to provide 401(k) plans, but the Secure 2.0 legislation does include a provision that requires employers to automatically enroll their employees in a 401(k). This mandate does not apply to existing plans, businesses with 10 or fewer employees, or companies that are less than three years old.

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State programs have certain restrictions. For instance, they do not offer the same matching contribution that many 401(k) plans do.
The amount of money that can be contributed to a Roth IRA is lower than what can be put into a 401(k) plan. In 2023, the maximum contribution is $6,500, although those who make more money may not be able to contribute as much, or at all. Additionally, those aged 50 or older are allowed to make an extra $1,000 "catch-up" contribution.

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In 2023, the contribution limit for 401(k) plans is set at $22,500, with those aged 50 and over being able to contribute an additional $7,500.
In contrast to traditional IRAs or 401(k) plans, Roth IRAs do not impose a penalty if you take out your contributions before the age of 59½. Nevertheless, if you withdraw earnings early, you may be subject to a tax and/or penalty.

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States have come to understand that if they do not take action, they will be faced with a greater demand for state-funded social services for retirees who are having difficulty making ends meet. As a result, they have implemented programs to address this issue.
Antonelli noted that states have taken the initiative to reduce the disparity in access to retirement savings. He further pointed out that the consequences of inaction are dire, with many states facing billions of dollars in budget and fiscal losses over the next two decades due to an aging population that has not saved for retirement.