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Access to a work-based retirement plan increasingly depends, at least in part, on where you live.
Over the past decade, 16 state legislatures have passed retirement savings programs targeting workers whose employers do not offer 401(k) plan or similar option. Some programs are operational, while others are in the planning stage.
Some are also voluntary for companies. But most require companies to offer their own 401(k) or facilitate automatic enrollment of their workers — who can opt out — into individual retirement accounts through the state’s so-called self-IRA program.
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“On average, we’ve seen one to two new state programs enacted each year, and we expect that trend to continue in 2023,” said Angela Antonelli, executive director of the Center for Retirement Initiatives at the University of Georgetown.
“We should see program assets soon exceed $1 billion and over a million savings accounts soon in 2023, and then continue to grow faster as more states open up,” Antonelli said. .
Here’s what’s in the pipeline
Last year, Maryland and Connecticut launched their self-IRA programs, joining Oregon, California and Illinois. Colorado and Virginia are expected to do so this year. Others, including Delaware, New Jersey and New York, are still in the planning stages.
Overall, 46 states have taken steps since 2012 to implement a program for uncovered workers, consider legislation to start one, or study their options, according to Antonelli’s organization.
Although there are some differences between the programs, they generally involve automatic enrollment of workers in a Roth IRA with a payroll deduction starting around 3% or 5%, unless the worker opts out (about 28% to 30% do, Antonelli said). There are no fees for employers and the accounts are managed by an investment company.
Contributions to Roth accounts are not tax deductible, as is the case with 401(k) plans or similar workplace options. Traditional IRAs, whose contributions may be tax-deductible, are an alternative in some states, depending on the specifics of the program.
Among current self-IRA programs, workers have raised more than $630 million across 610,000 accounts through 138,000 employers, according to the center.
About 57 million people do not have access to a work plan
Of course, there is still a long way to go to reach all of the estimated 57 million workers who do not have access to an employer retirement account.
Although you can set up an IRA outside of employment, people are 15 times more likely to save if they can do so through a work plan, according to AARP.
Larger companies are more likely to offer 401(k) plans. Among employers with 500 or more employees, 90% offer a plan, according to the US Bureau of Labor Statistics. This compares to 56% in companies with less than 100 workers.
Auto-IRA programs address this disparity: all but the smallest businesses — say, less than 10 workers or those that don’t use an automated payroll system — are mandated to participate or offer their own plan. .
Some companies choose 401(k) over the state program
It seems some companies are opting for a 401(k) instead: In the year since the launch of the first three self-IRA programs – Oregon (2017), Illinois (2018) and California (2019) – the growth rate has was 35% higher. among the new 401(k) plans of private companies in these states compared to other states, according to recent search of Pew Charitable Trusts.
“We’ve seen growth in new 401(k) plans in states that have adopted self-IRAs,” said John Scott, director of Pew’s Retirement Savings Project. “A lot of employers say they would rather have a 401(k), so in a lot of ways I think state programs push employers to offer 401(k) plans.”
Federal rules encourage companies to offer 401(k)
Changes at the federal level, enacted as part of the Secure Act of 2019, also aim to help small businesses offer 401(k) plans. Instead of sponsoring their own plan and taking on the administrative and fiduciary responsibilities that come with it, they can join a so-called joint employer plan with other companies – a sort of shared 401(k).
Legislation known as Secure 2.0, which was adopted last monthincludes provisions to further enhance the attractiveness of a group plan.
“The idea is to try to fill the [access] gaps as much as possible,” Scott said.
While Congress has seemed reluctant so far to require companies to offer a 401(k), lawmakers have included a mandate in Secure 2.0: 401(k) plans will automatically enroll their employees. However, it excludes existing schemes, companies with 10 or fewer workers and companies less than three years old.
Limitations to state programs
There are limits to state programs. For example, they do not provide a matching contribution like many 401(k) plans do.
Contribution limits are also lower than 401(k) plans. You can put up to $6,500 in a Roth IRA in 2023, though high incomes are limited in what they can bring, if at all. In addition, anyone aged 50 or over is entitled to an additional “catch-up” contribution of $1,000.
For 401(k) plans, the contribution limit is $22,500 in 2023, with those 50 and older eligible for an additional $7,500.
However, Roth IRAs — unlike traditional IRAs or 401(k) plans — also incur no penalties if you withdraw your contributions before age 59½. However, for withdrawing winnings earlier, there might be a tax and/or penalty.
Programs too are partly driven by necessity. Essentially, states have recognized that doing nothing means risking increased pressure on state-funded social services for financially challenged retirees.
“States have taken the lead to start closing the access gap,” Antonelli said. “The cost of doing nothing is too high, with budget and fiscal impacts estimated in the billions of dollars for many states over the next 20 years due to an aging population that will have little or nothing to do. saved for retirement.