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Auto-IRA is an abbreviation for Auto-Enrollment Individual Retirement Account. These programs require companies of a certain size to offer their own workplace retirement plans or facilitate payroll deductions into state-sponsored IRAs at no cost to the employer.
In the latter case, a portion of the worker’s salary (usually 3% to 5% of income) is automatically contributed to the state plan. Workers can opt out.
More than 800,000 workers participate in Auto-IRAs, resulting in total savings of more than $1 billion. according to to the Pew Charitable Trusts.
On average, they save about $165 a month, said John Scott, director of Pew’s Retirement Savings Project.
“That’s a significant amount of money every month for these workers, many of whom I think have never saved for retirement in their lives,” Scott said.
Pew said about 195,000 employers facilitate state payroll deductions to automatic IRAs. It’s unclear how many other companies have chosen to sponsor their own 401(k) plans or other workplace plans instead.
More states plan to move their programs online in the coming years, including Delaware, Hawaii, Maine, Minnesota, Nevada, New Jersey, New York and Vermont, according to the Center for Retirement Initiatives.
(Other states, such as Massachusetts, Missouri, New Mexico, and Washington, have created separate programs in which employer participation is voluntary. Hawaii’s upcoming program will also be slightly different. Workers must opt in as they are not automatically enrolled.)
Scott said there’s a common thread here: a recognition that people aren’t saving enough for retirement.
Companies are moving away from pensions in favor of 401(k)-type plans, shifting more responsibility for savings onto workers. According to Vanguard, the typical saver between the ages of 55 and 64 has just $71,000 in 401(k) savings. data.
According to another Vanguard, all but the highest-income baby boomers are projected to fall short of a sustainable retirement income, even after accounting for Social Security. analysis. (High income boomers are people from 1995)th Percentile by income. Their average annual salary is $178,000. )
This is a significant amount of money each month for these workers, and I think many of them have never saved for retirement in their lives.
John Scott
Director of Retirement Savings, Pew Charitable Trusts
Meanwhile, the US population is aging.
In the 1980s, there were 3.9 working-age households for every elderly household, according to the Center for Retirement Initiatives. This ratio has since dropped to around 2.5.
Without policy adjustments, these trends are expected to place fiscal stress on states. For example, experts say states may need to increase spending on public assistance programs because more seniors are unable to make ends meet. Working adults may also have to shoulder an even greater tax burden.
pew Estimate State spending is expected to increase by $334 billion from 2021 to 2040 due to insufficient retirement savings.
Some parliamentarians I’ve tried But efforts to create a national automatic IRA or similar program have failed in recent years.
Lack of 401(k) access disproportionately harms certain groups, such as people who work at small businesses. according to Contact the Retirement Initiatives Center. Access disparities are even greater among low-income workers, young workers, minorities, and women.
As a result, participants in automatic IRAs are skewed toward women, young people, and unmarried people, Pew found. A larger proportion are people of color with only a high school education.
Automatic enrollment in such plans is intended as a behavioral effort to overcome procrastination, a typical barrier to enrollment in 401(k) plans. Scott said about 30% of people opt out.
Since the account is a Roth IRA, it can also be used as an emergency fund. Scott said. In such accounts, investors can withdraw contributions (but not necessarily earnings) at any time and at any age without penalty, since they have already paid income tax on the funds. .
Experts say automatic IRAs have several drawbacks.
As an example, IRAs have lower annual worker contribution limits than 401(k) plans, at $23,000 versus $7,000 in 2024, respectively. (Only 15% of savers maxed out their 401(k) contributions in 2022, according to Vanguard data.)
Additionally, there is no employer match and workers receive “free” money from the 401(k) plan’s sponsoring company. According to the American Council of Plan Sponsors, about 80% of 401(k) plans offer a match.
Auto-IRAs also do not cover all state employees. For example, gig workers don’t have access. Depending on your state’s rules, the smallest businesses may not have to participate.
“These are not perfect programs,” Scott said. “But this works. People are saving for retirement.”
