Around a third of the US workforce does not have access to a retirement savings plan at work.
Research shows people are 15 times more likely to save for retirement when a plan is operated by their employer and contributions are automatic.
State-sponsored retirement programs are cropping up across the US, many of which mandate employers of a certain size to auto-enroll their employees in IRAs.
Oregon, Illinois, and California have similar programs that start employees at a 5% contribution rate, with automatic annual increases.
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Most Americans struggle to save for retirement, that’s no secret.
But environment, rather than lack of interest or knowledge, might often be the inhibitor.
Just about anyone with earned income can open up an individual retirement account, or IRA, at a brokerage or bank, but as research from the AARP Public Policy Institute reveals, workers are 15 times more likely to contribute to a retirement plan when it’s operated by their employer in the form of an automatic payroll deduction. Yet, around 55 million Americans don’t have this option.
In other words, nearly a third of the US workforce is missing the convenience factor, and it puts them at a major disadvantage.
Since 2012, nearly every state has either introduced legislation or considered enacting a state-sponsored retirement savings program for workers in the private sector to make it easier to save, and at no cost to employers or taxpayers, according to the Georgetown University Center for Retirement Initiatives. Around a dozen states have passed legislation and a handful have programs up and running.
The incentive for states? To ease pressure on social services when people retire. Some of the programs require businesses without a retirement plan to auto-enroll their employees in the state’s program, which sets up an IRA in their name and sets a default salary-deferral rate. The contributions are generally after tax. Other states don’t mandate participation, but might allow individuals to sign up on their own through a marketplace.
The businesses are usually a middle man, tasked with enrolling employees in the state’s program and making sure their deferral rate is applied to payroll. Employees can manage their investments directly with the private retirement plan provider. In 2020, workers can save up to $6,000 in IRAs (traditional and Roth combined), or $7,000 of they’re over age 50.
Here are 11 states with established programs helping people save for retirement.
By September 30, 2020, California companies with more than 100 employees and no employer-sponsored retirement plan must be registered with CalSavers, an auto-IRA plan.
Employees are given the option to choose a Roth IRA contribution rate — which is automatically deducted from their after-tax paycheck — opt out of saving entirely, or do nothing and be auto-enrolled to contribute 5% of their income. There’s also an option to auto-increase the savings rate by 1% each year, until it reaches 8%.
The annual asset-based fee for Roth IRAs in the CalSavers program — which is managed by Ascensus College Savings Recordkeeping Services — is between 0.825% to 0.92%, depending on investment choice.
Employees can choose to invest their money in a money market fund, a bond fund, a global equity fund, a Sustainable Balanced Fund (ESG), and a suite of target date funds. The first $1,000 in contributions for each member will be invested in a target-date fund matched to their age, unless they opt out.
The deadlines for companies with 50 or more employees and five or more employees are June 30, 2021 and June 30, 2022, respectively, but employees over 18 can sign up at any time with a Social Security number or Tax Identification Number. CalSavers estimates the program will ultimately reach more than 7 million Californians.
Colorado is in the very early stages of implementing its state-sponsored retirement savings program, which was just approved by state legislature in June. About 40% of the Colorado workforce doesn’t have access to a workplace retirement plan, the bill said.
Details of the Colorado Secure Savings Program are still being finalized, but it is expected to require employers of a certain size to register and auto-enroll employees in IRAs with default contribution rates and the ability to opt out.
The Illinois Secure Choice Retirement Savings Program, or Secure Choice, began as a pilot program in late 2018 and rolled out quickly. It now requires employers with 25 or more employees who have been in operation for at least two years and do not offer a retirement plan to offer an IRA, unless they are deemed exempt. Self-employed and part-time workers are also eligible.
Employees can opt out, choose their own contribution rate, or be defaulted to a 5% contribution rate. They also have the opportunity to select auto increases of 1% each year.
The program is run by Ascensus and allows employees to invest in a capital preservation fund, conservative fund, growth fund, or target-date retirement fund. The annual asset-based fee for participants is about 0.75%.
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