I wrote my first article about the emergence of state IRA programs across the country in March 2021. At the time, nearly half of Americans did not have access to a retirement plan at work.
More than a year later, not much has changed; Nearly 57 million Americans Still unable to access an employer-sponsored retirement plan.
However, the assets of the state’s automatic IRA program have nearly tripled since December 2020; More than $450 billion in total assets and nearly 520,000 funded accounts in OregonSaves, Illinois SecureChoice, CalSavers, and MyCTSavings.
Bottom line: Automatic government IRAs are working, and more Americans are building a retirement nest egg. It is also important to note that more countries are starting to take action to help individuals move forward on the retirement path as they recognize and accept that our country is in a retirement crisis.
This year, at least 21 states have proposed legislation or formed study groups to create new programs. This work is currently resulting in all but four states creating state-administered retirement programs. The four countries that are not currently Addressing the retirement crisis in Alaska, Alabama, Florida and South Dakota. Washington, DC, too, has not made any recent efforts to mitigate the problem.
Automatic IRAs
Of the 46 states that recognized the retirement savings gap, 16 states and 2 cities created retirement plan programs. Most programs are set up as automatic IRAs or “auto-IRAs,” and outliers are created as voluntary programs. California, Connecticut, Illinois, and Oregon all have automatic IRA programs that are currently open to all employers and eligible private sector workers. In my state, California, CalSavers has been rolled out over three years – 2020, 2021 and 2022.
This year, employers with five or more employees were required to approve their retirement plan or sign up for CalSavers by June 30. Connecticut and Oregon also implemented their program in waves based on the number of employees. In contrast, the Illinois program affects only companies with 25 or more employees who have worked in the state for at least two years.
“The American Association of Retired Persons (AARP) Research It shows that Americans are 15 times more likely to save for retirement when they can do so at work and 20 times more likely if their workplace savings are automatic.”
This turns out to be true across automated government IRAs that are set up with an automatic starting savings rate of between 3% and 5%. Some programs also include an automatic annual escalation. For example, CalSavers starts at 5% and automatically increases by 1% each year until the individual saves 8% of their income. Employees can always opt out if they don’t want to save.
As of July 31, 2022, CalSaver Effective Withdrawal Rate was less than 38% and Oregon It was 25.3% lower. State IRAs have more robust participation rates between 62-75%+ while only 58% of eligible Employees with access to an employer-sponsored retirement plan Sign up for their 401(k) plan.
Many government IRAs are set up as Roth IRAs. As financial planners, we help low-income individuals understand the benefit of making after-tax contributions to a Roth IRA rather than making a pre-tax contribution to a traditional IRA.
No long-term value
There is no significant long-term value in contributing to a traditional IRA account if the person receives only a token tax deduction or nothing. A low-income person today is likely to benefit most by making after-tax contributions if tax rates increase at retirement. While no one knows what tax rates will be in the future, the top Federal tax rates were generally around 30-40%. over the past thirty years.
The inconvenient but not surprising fact is that the average American lacks a basic understanding of financial skills, which include the importance of saving. If Americans understand the basics of personal financial management, perhaps more individuals who do not have access to a retirement plan at work and contribute to Individual Retirement Accounts (IRAs) will be opened up as an alternative.
While many states introduce legislation to mandate personal finance education, financial literacy may not be the only factor driving the retirement crisis. Behavioral finance and psychology cause major setbacks; Our brains are not naturally good at saving.
If we understand and agree with both factors, state advisors and policy makers can use tools and features such as automatic enrollment and escalation to improve outcomes. My team’s experience working with business owners to set up a 401(k) plan for their company is similar to automated government IRAs: Plans with automatic enrollment features have higher participation rates and, as a result, better retirement outcomes.
Change is the result of action, and with the right leadership, financial planners and policy makers can work together toward the same goal—helping more Americans move forward in retirement.
Amie Agamata is a Certified Financial Planning™ firm in San Diego, California with clients throughout the United States. Her team’s business mission is to “work together to achieve financial success through understanding, education, and action©.” Amy is the NexGen-elect president of the nationwide Financial Planning Association (FPA), a member of the FPA’s Retirement Income Planning Advisory Board, and serves on the American College Alumni Council.