Three more states now require employers to offer automatic individual retirement accounts (IRAs) to their employees, and research shows that the mandates boost the number of private plans offered as well as participation in existing plans.
Using the U.S. Bureau of Labor Statistics and Census Bureau Current Population Survey data, the Georgetown University Center for Retirement Initiatives (CRI) found that residents of states that adopt auto-IRA legislation are 3.2% more likely to work for an employer that offers a retirement plan after auto-IRA policy implementation. There is also a 7% increase in the probability of a worker participating in such a plan, according to CRI.
Three auto-IRA programs were enacted in 2023 – in Minnesota, Nevada, and Vermont. Vermont changed its existing voluntary Multiple Employer Plan (MEP) to an auto-IRA program. One new MEP was enacted in Missouri.
By the beginning of 2022, 14 states had signed retirement plan legislation into law including California, Connecticut, Illinois, Massachusetts, Oregon, Washington, Colorado, Maine, Maryland, New Jersey, New Mexico, Virginia, Vermont, and New York, according to ADP.
In Virginia, businesses that have been open for at least two years, don’t offer a qualified employer-sponsored retirement plan and have at least 25 full-time employees who work an average of 30 hours per week must comply by Feb. 15.
“A company can choose to offer another plan outside of the state plan to comply, which would be options like a Simple IRA or 401(k),” said Coley Eckenrode, Virginia Asset Management partner and financial advisor.
As of Jan. 1 of this year, CRI counted 19 states that offer new programs for private sector workers with 15 of them mandating auto-IRA programs.
Required participation varies by state — small businesses may not be required to participate in some, but many require participation of businesses that have five employees.
During the 2023 legislative year, at least 25 states and the District of Columbia introduced bills to establish new programs, amend existing programs, or form study groups to explore options, according to CRI.
“Our research findings suggest that employers in states that implement a state auto-IRA program are more likely to offer their own plans and workers are more likely to participate in such plans,” wrote CRI.
According to The Pew Charitable Trusts, as of November, more than 800,000 workers are participating in auto-IRAs in seven states adding up to more than $1 billion in retirement savings.
John Scott, director of Pew’s retirement savings project, told CNBC that employees save about $165 a month, on average, with auto-IRAs.
“This is a significant amount of money each month for these workers, many of whom, I’d say, have never saved for retirement in their lives,” he told CNBC.
Nearly 195,000 employers are facilitating payroll deduction into a state auto-IRA, Pew said. It’s unclear how many other companies instead opted to sponsor their own 401(k) plan or other workplace plan.
According to investment firm Vanguard’s 2023 “How America Saves” report, Americans “remained resilient” in 2022 when contributing to retirement savings plans despite economic ripples caused by the COVID-19 pandemic including inflation and higher interest rates.
The average account balance for Vanguard participants was $112,572 in 2022 and the median balance was $27,376 — a decrease of 20% compared to year-end 2021, driven primarily by the decrease in equity and bond markets over the year, according to the report.
Out of its 4.9 million participant plans at the time of the study, nearly half of them provided only a matching contribution in 2022, and 36% of plans provided both a matching and a non-matching employer contribution. Ten percent of plans provided only a non-matching employer contribution.
During the 2024 legislative year, several states are expected to introduce or continue to advance bills to establish or amend state retirement savings programs. CRI says states to watch include Hawaii, which plans to make program amendments; Michigan; Massachusetts, which plans to make amendments to its current program or a program change; Pennsylvania; Rhode Island, and Washington, which may make a program change.
For businesses that already offer an employer-sponsored plan, CRI says the only effect auto-IRA programs should have is a change in IRA enrollment defaults. “Firms that drop ESRPs in this context would reduce workers’ compensation, which would have to be offset by wage increases,” CRI wrote.
“Considering a behavioral economics framework, auto-IRA laws could raise the prominence and awareness of retirement plans, potentially increasing their perceived value and adoption. Moreover, financial service providers might also leverage these laws to sell retirement products and services to employers.”
However, it’s possible that the state plans could also “crowd out” private alternatives, CRI added.
Data from CRI, released in December 2020, showed that an estimated 57 million private sector workers, or 46%, didn’t have access to a retirement savings plan through their jobs.
“These access gaps are inequitably distributed, affecting more small businesses, and with larger gaps among lower-income workers, younger workers, minorities, and women,” CRI wrote at the time.
“More accessible savings options help the competitiveness of small businesses and the financial security of workers, including the self-employed, encouraging a more dynamic economy, while increased savings levels grow the income that senior households have available to spend in retirement. In addition to the returns they generate for individuals, personal savings provide a source of capital for business investment and growth.”
Another option outside of state-offered programs that collision industry businesses can consider is the Society of Collision Repair Specialists (SCRS) 401(k) MEP.
In 2019 SCRS began using the collective buying power of its membership to offer more affordable and attractive 401(k) options, and have effectively helped participating members save upwards of $15,000 per year while improving on their retirement options for their team, SCRS said.
Eckenrode is one of two investment advisers to the SCRS plan and told Repairer Driven News that it “would be a viable solution and would meet the necessary requirements” of Virginia retirement requirements.
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