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Could Auto-IRA Legislation in Your State End Your 401(k)?


It’s been well-documented that American workers aren’t saving enough for their retirement, and both federal and state governments have been taking action to avoid having a nation full of poverty-stricken senior citizens. Now, a total of 18 states are requiring employers who don’t offer a 401(k) account or similar workplace retirement savings plan to automatically enroll their workers in state-backed Roth IRAs.

Consider working with a financial advisor as you create or update a retirement plan. 

Fortifying Retirement With Automatic IRAs

Up to 57 million Americans work for employers who don’t offer retirement savings plans, according to retirement services provider Empower, while the Employee Benefit Research Institute estimated the retirement savings deficit to be $3.68 trillion in early 2020.

To fill that gap, the U.S. Dept. of Labor has been requiring employers who add 401(k) and similar plans to automatically enroll all eligible workers, a requirement that will expand in 2025. In the same vein, states from California to Maine are requiring all but the smallest employers to either add a workplace plan or to automatically enroll workers in a state-sponsored plan that usually involves a Roth IRA

In these plans, 3% to 5% of an employee’s wages are automatically deposited in a Roth account as soon as they start work, although employees can choose to opt out. Employees have a limited choice of investment options, much like most 401(k) plans. Plan fees are capped at 1%, in most cases, and an oversight board is put in place. While some plans use the traditional individual retirement account (IRA) most use a Roth IRA because workers can withdraw contributions (but not earnings) at any age with no tax penalty. 

Other Proposals to Solve the Retirement Problem

Couple discussing their retirement savings plans.

While some feared state-mandated plans might encourage employers to shut down their workplace plans and relegate retirement savings to state programs, that doesn’t seem to be happening. Among the first three states to require auto-enrollment in state plans (Oregon, Illinois and California), employers chose to start 401(k) programs at a 35% higher frequency than other states. Companies with employees in more than one state may find it preferable to operate their own retirement savings plan rather than comply with individual requirements in several states. 

As of January 2023, 138,000 employers had 610,000 accounts with a total value of $630 million, according to Georgetown University’s Center for Retirement Initiatives. The center estimates that these programs should hit more than 1 million accounts with a combined value of more than $1 billion sometime this year. 

Limitations of the Automatic 401(k)

Still, there are potential drawbacks. Unlike a 401(k) plan, state-mandated Roth IRAs programs can’t allow for an employer match. Another issue is that many auto-enrollment programs default all contributions to ultra-safe investment options offering paltry returns. Critics of the program have carped that workers would be better off using their money to pay off debt before investing for retirement.

Contribution limits apply to Roth IRAs, whether state-mandated or independent of an employer. The 2023 limit on contributions to IRAs is $6,500, with $1,000 in allowable catch-up contributions. The contribution limit for 401(k) plans is $22,500 with up to $7,500 in additional catch-up contributions available for workers 50 and older.

Bottom Line

Three stacks of coins

If you’re auto-enrolled in a state-mandated IRA, check your options to make sure your money is appropriately invested for your stage in life. Consider increasing your contributions if you can. While auto-enrollment programs can save as little as 3% of your salary, financial experts advise saving 10% to 15% for retirement. You might be better off opting out of an employer’s plan and contributing to your own tax-deferred IRA to find a wider range of investment options for both a traditional IRA and a Roth IRA.

Tips on Tax-Advantaged Retirement Plans

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