State-run automatic IRAs for workers are on the rise
Denise Geske panicked two years ago when her accountant told her about a new Illinois law that would require her to enroll her employees in a retirement savings program.
“As a small-business owner, I felt it was overwhelming,” she said. “I was terrified that I was going to be mandated to do one more thing.”
Geske, co-owner of Fox & Hounds Salon and Day Spa in Bloomington, Ill., is close with her staff of 32 massage therapists, aestheticians and nail technicians. She wanted to give them health and retirement benefits, but since 2008, when she bought the business with her sister, Casey Pirtle, providing them with a savings plan had felt beyond her reach.
Her concerns were eliminated by Illinois Secure Choice, a stateadministered automatic individual retirement account program begun in 2018. The management and cost hurdles that Geske had assumed the state would make her take on never materialized; the program, she said, is not complicated, and she bears none of the cost. Her employees, the savers themselves, pay the fees — but those are kept low by the large pool of participants.
Now every Fox & Hounds worker has access to health insurance and retirement savings. “And I didn’t have to invest a lot of time figuring it out, and it’s free,” Geske said. Another benefit: She is under no pressure to match workers’ contributions. Federal guidelines prevent anyone other than the individual account owner from contributing to the accounts.
Automatic IRAs such as the program in Illinois were once contemplated on a national level. In 2007, a Brookings Institution report about their potential for universal retirement security prompted politicians, including Barack Obama, to talk about a federal auto IRA plan. But legislation on that level never passed, so states started ad
vancing the idea of enforcing, and managing, employer plans themselves.
Business owners in other states can expect to navigate some version of Geske’s involuntary education on auto IRAs in the months and years to come. Outside Illinois, programs are running in California and Oregon. Connecticut, Colorado and Maryland will start signing up employers in 2021. New Jersey has passed a law to build its own version. And at least 20 states and cities introduced legislation this year to establish programs or form study groups to explore their options, said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University.
For all those states and cities, the goal is the same. The employers of half of private-sector workers in America — 55 million people — do not offer a retirement savings vehicle, Antonelli said. Anyone
can open an IRA, but Antonelli said many workers were unwilling to navigate opening and funding an account on their own.
“State savings plans help address the access gap,” she said.
The programs share similar characteristics. In California, Illinois and Oregon, employers that do not offer a retirement savings program such as a 401(k) but have more than a certain number of employees must enroll with the state program by a deadline or face a fine (in California, $250 for each employee). Once a business is enrolled, it uses its payroll system to register workers, who can opt out of the savings program at any time.
Paycheck deductions happen automatically and generally start at 5 percent, with some programs including an annual automatic uptick (in California, topping off at 8 percent) that employees can adjust. Other common characteristics include portability, meaning
workers can keep saving in the same plan if they change jobs, and easy access to funds. Auto IRAs are generally Roth IRAs, which are funded with after-tax dollars and typically allow for withdrawals of contributions without penalties.
John Wasilisin, executive director of Maryland’s program, MarylandSaves, which will begin next year, likes that feature. If someone has an emergency medical expense, he said, “they can easily get to their money.”
In a year of coronavirus-induced calamities, that is important — especially to the U.S. workers whomauto IRAs may benefit most: the low-income ones. While about half of workers ages 25 to 64 in the top 10 percent of earners have access to a retirement plan at their job, the number drops to 23 percent in the bottom half of earners, an August report by the Schwartz Center for Economic Policy Analysis at the New School in New York shows.
States are discovering that access makes a difference. In 2017, Pew researchers found that only 13 percent of workers said they would opt out of an IRA, but that number could look a little different in practice. In California, for example, 33 percent of workers who haven been offered enrollment since July 2019 have chosen to opt out of CalSavers, that state’s auto IRA. At Geske’s Fox & Hound in Illinois, 30 to 35 percent have opted out.
Some of those workers may have set up IRAs independently. Others may have a spouse with a 401(k). Some may feel they can’t afford to put away even $50 per paycheck. Regardless of the reason, all the active programs have adopted a no-pressure philosophy.
As auto IRAs gain footholds around the country, critics have surfaced.
“It’s hard to say it’s a bad thing to make a savings opportunity available to people, but I would have preferred that there was more thought behind them,” said Andrew Biggs, a resident scholar at the American Enterprise Institute, a conservative think tank, and former principal deputy director of the Social Security Administration.
“A danger I see is, if you offer these plans, employers that are offering 401(k)s might stop doing that,” he said, given that employers can’t match employee contributions.
In addition, Biggs said, “if you’re a low-income person, you probably have bigger fish to fry” than saving for retirement. As a partial solution to the savings crisis, he recommends increasing Social Security benefits “pretty substantially” for low-income workers.
Yet employers such as Geske, who is also a Secure Choice saver, are relieved to have the option.
“I’m 51, and before this program came along, I had no retirement savings,” she said. “Now I’ve been checking my account balance, and I see I’m actually making money I don’t even miss.”