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Whether you have access to a pension plan through work depends, at least in part, on where you live.
Over the past decade, 16 state legislatures have enacted retirement savings programs targeting employees whose employers do not offer a 401(k) plan or similar option. Some programs are ready and others are in the planning stages.
Some businesses have volunteered to participate. But it requires most companies to either offer their own 401(k) or make it easy for their employees to automatically enroll in individual retirement accounts through the state’s automatic IRA program.
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“On average, we’ve seen one to two new state programs go into effect 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 surpass $1 billion soon, over 1 million thrift accounts in 2023, and then continue to grow even faster as other states open,” Antonelli said.
Here’s what’s in the pipeline
Last year, Maryland and Connecticut joined Oregon, California and Illinois in launching automatic IRA programs. 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, according to Antonelli’s organization, 46 states have taken action since 2012 to either implement an open worker program, consider legislation to start one, or study their options.
While there is some variation in the programs, they generally involve automatically enrolling employees in a Roth IRA, unless the employee opts out (about 28% to 30%, Antonelli says) starting at about 3% or 5% of salary. with the catch. . There is no cost to employers and the accounts are managed by the investment company.
Contributions to Roth accounts are not tax deductible as they are with 401(k) plans or similar workplace options. Traditional IRAs, whose contributions are tax-deductible, are an alternative in some states, depending on the specifics of the program.
Among current automatic IRA programs, workers have accumulated more than $630 million across 610,000 accounts through 138,000 employers, according to the center.
About 57 million people do not have access to a workplace plan
Of course, there is still a long way to go before reaching all of the 57 million workers without access to an employer-based retirement account.
Although you can set up an IRA outside of the workplace, people are 15 times more likely to save if they can do so through a workplace plan, according to AARP.
Larger companies offer more 401(k) plans. According to the US Bureau of Labor Statistics, 90% of employers with 500 or more employees offer a plan. This compares to 56% in firms with fewer than 100 employees.
Automatic IRA programs address this discrepancy: All but the smallest firms—for example, those with fewer than 10 employees or those that don’t use an automated payroll system—face a mandate to participate or offer their own plans.
Some companies choose a 401(k) over a government program
Some companies seem to be opting for the 401(k) instead: One year after the first three automatic IRA programs launched — Oregon (2017), Illinois (2018) and California (2019) — there was a 35% higher growth rate. Among new 401(k) plans in private businesses in these states versus other states, according to a recent study by the Pew Charitable Trusts.
“We’ve seen an increase in new 401(k) plans in states that have adopted automatic 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 driving employers to offer 401(k) plans.”
Federal regulations encourage businesses to offer 401(k)s
Federal-level changes enacted as part of the SAFE Act of 2019 are also intended 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 an employer plan combined with other businesses—a kind of shared 401(k).
The legislation, known as Secure 2.0, which took effect last month, includes provisions to further increase the appeal of a bundled plan.
“The idea is to try to fill it [access] gaps as possible,” Scott said.
While Congress has so far shied away from requiring companies to offer 401(k), lawmakers have included a mandate in Secure 2.0: 401(k) plans will have to automatically enroll their employees. However, it excludes existing plans, businesses with 10 or fewer employees, and companies less than three years old.
Restrictions on government programs
State programs have limitations. For example, many 401(k) plans do not offer matching contributions.
Contribution limits are also lower than 401(k) plans. In 2023, you can put up to $6,500 in a Roth IRA, although higher earners are limited in what they can contribute. Also, anyone age 50 or older is allowed an additional $1,000 “catch-up” contribution.
The contribution limit for 401(k) plans is $22,500 in 2023, with the 50-and-over crowd allowing an additional $7,500.
However, Roth IRAs—unlike traditional IRAs or 401(k) plans—have no penalty if you withdraw your contributions before age 59½. There may be a tax and/or penalty for early withdrawal of earnings.
Programs also arise partly out of necessity. In fact, states realized that doing nothing risked increasing pressure on state-funded social services for financially strapped retirees.
“States have taken the lead to begin closing the access gap,” Antonelli said. “The cost of doing nothing is enormous, with significant billions of dollars in estimated budget deficits and fiscal implications for many states over the next 20 years due to an aging population that will save little or nothing for retirement.”