'State-sponsored' IRAs are coming to the rescue of workers

Booming state-sponsored retirement plans offer a glimmer of hope for workers trailing behind with their retirement savings.

State-sponsored automated savings plans, which usually take the form of individual retirement accounts (IRAs), are automatically funded with approximately 3%-5% of an employee’s paycheck.

These savings vehicles, which have grown in recent years, are designed to support private-sector workers who otherwise lack access to employer-sponsored plans.

The balance on the combined plans has been climbing since mid-2017 when Oregon introduced its pilot program and hit $1 billion last quarter.

A handful of other states quickly followed in its footsteps, including Illinois, California, Connecticut, Maryland, and Colorado, catapulting retirement savings for tens of thousands of small businesses and 800,000 employees.

(Virginia did, too, but their data was not included in the tally.)

Small businesses are incentivized to join because they can offer state-run automated savings plans at zero cost to them. In turn, offering a retirement plan can help them recruit workers and keep top industry talent.

Over six years to 2023, the balance on these savings plans ballooned from nearly nothing to current levels, led by Oregon, where retirement savings neared $230 million. The average monthly savings per plan member is about $165.

While this total might seem like a drop in the bucket compared to total U.S. retirement assets of $35.7 trillion across savings vehicles (annuities, public and private pensions, defined contribution, and IRAs), it’s a huge jump for many small businesses that have largely been watching from the sidelines.

Meanwhile, retirement assets in state-run automated plans must face the same volatile markets as other investment vehicles, including the post-Covid downturn, making their latest achievement all the more impressive.

“2022 was a relatively traumatic year for investors, where both stocks and bonds experienced double-digit losses. This is incredibly rare, historically,” noted David Blanchett, head of retirement research at PGIM DC Solutions.

While states are coming to the rescue of America’s private sector workers, the fact remains that two-thirds of small businesses have yet to jump on the retirement savings bandwagon, according to Fidelity Investments.

State-run automated IRAs have the potential to help.

Small business savings stalemate

Over half (52%) of American workers are without the option to save money through an employer-sponsored plan, historically the best way to prepare for retirement. For employees of small businesses, the situation is even worse.

A mere 34% of small businesses offer retirement plans, and close to half of U.S. workers are employed by a small business. Clearly, there’s a huge disconnect here.

The main reasons small business owners fail to offer employees a retirement plan are costs, time, and knowledge.

Micro businesses with fewer than 10 employees are even less prepared to offer their employees retirement benefits, with many saying that they can’t compete with bigger businesses on pay and benefits.

Additionally, nearly three-quarters of small business owners themselves feel they aren’t even saving adequately for their future.

Not offering retirement benefits could be costing the small business community more than it bargained for, according to Andrew Schreiner, Fidelity’s senior vice president for small business retirement.

“While offering a retirement benefit can feel like a potentially expensive and overwhelming task, there are many retirement saving solutions available for companies of all sizes,” he said. “In addition to helping their employees establish a secure financial future, a retirement benefit also can have an enormous impact in attracting and retaining top talent.”

As millions of Americans inch closer to retirement each year, automated savings plans can mean the difference between a comfortable retirement and a miserable one.

State-run plans take the spotlight amid “retirement crisis”

Most of the $9.9 trillion in employer-sponsored retirement savings that Americans possess are split between 401(k) accounts, where new millionaires are being minted every day, and individual retirement accounts.

Tens of millions of private sector workers whose employers don’t offer a plan have been out of luck.

Although state-run automated savings plans are a great start for small business owners and their own employees, states have hoops to clear before they can offer them, starting with proper legislation.

After green-lighting automatic savings measures last year, Minnesota is on the path to launching its Secure Choice retirement program for private sector employees, but not until at least 2025. Residents can thank the influence of the American Retirement Association (ARA) that they will have a plan at all.

Rep. Jamie Becker-Finn, the state lawmaker behind the retirement savings bill and a small business owner, believes her state is facing a “retirement crisis.”

“It’s a very nerdy group to brag about getting support from, but the American Retirement Association is a big deal,” he said. “The ARA recognizes that despite our best efforts in the private sector, there are far too many Americans without access to a retirement plan at work. So that is what we are trying to fix in this bill.”

While America may be the richest country in the world, not everyone is headed for a secure retirement. Vermont’s Sen. Bernie Sanders noted that almost half of Americans 55 or older have zero retirement savings, while approximately one in 10 seniors live in poverty.

As a result of insufficient retirement savings, U.S. states are staring at a retirement shortfall of over $334 billion over the next two decades, Pew notes, a gap that automated IRAs could help to bridge.

One way that states are addressing the top challenges of auto IRAs is to partner together, a concept being pioneered by the likes of Colorado, Maine, and Delaware. By teaming up, these states will save money on administrative costs while bolstering their total assets under management, giving them more negotiating power with asset managers.

Other states with plans in the wings include Hawaii, New Jersey, New York and Vermont.