Strong Interest In Auto IRAs, But Will They Gain Traction?

Programs to help fill the widening retirement savings gap - particularly among small-business employees, minorities and women - seem to be slowly catching on.

But it’s still early to tell whether they will gain significant monetary and acceptance traction across the country, according to industry experts.

That was the overarching theme of the Employment Benefits Research Institute’s opening panel at its Winter Policy Forum this week. The discussion on “A Path to a More Equitable Solution: Solving the Retirement Coverage Gap,” looked at the alphabet soup of relatively new retirement savings plans – PEPs, ACPAS and state-sponsored IRAs – and how they can work together and independently to help close the retirement savings shortfall.

The latest estimates of the savings gap - what people have saved versus what they should have saved – is estimated to be close to $30 trillion and could grow to more than $100 trillion by 2050.

Ten states already have approved automatic contribution plan or arrangement schemes. Congress’ reconciliation bill calls for all but the smallest employers to provide automatic contribution plans.

“There is strong interest around the country in auto IRA programs,” said John Scott, retirement research director at the Pew Charitable Trust. “Eleven states introduced legislation in 2021 and I would expect more states will likely introduce legislation very soon. So we see a program that's starting to become entrenched and growing around the country.”

'A Way To Compete'

An auto IRA is a retirement account for those without the option to save in an employer-sponsored traditional retirement account such as a 401(k) or a pension plan. Auto IRAs can bridge the gap by offering an instrument to save for retirement, regardless of the nature of a worker’s job or industry. They require little involvement for employers beyond payroll management, so administrative and contribution costs are almost zero.

In fact, a survey of employers in the Oregon Secure Choice auto IRA program found high satisfaction levels. Roughly 73% said they were satisfied or neutral while 27% expressed dissatisfaction, Scott said.

“Interestingly, the satisfaction levels were highest among the smaller employers, which at first seemed a little counterintuitive,” he said. “But as I thought about it, I think smaller employers who can’t afford contribution plans see them as a way to compete with larger firms who are able to offer a 401(k)s.”

Still, contribution levels are low, and it will take some time before the programs could make a serious dent in the burgeoning savings gap. The three states that have active auto IRA programs – California, Illinois and Oregon – have amassed assets of $375 million in more than 400,000 funding accounts. Yet the average account balance is less than $1,000, Scott noted.

“That doesn't sound like a lot, but the first program just started four years ago and they're still enrolling workers every day,” he said. “So a lot of that number reflects the fact that many people today are really starting off at zero and participation is at 68%.”

Scott also noted although employers are required to enroll their workers in auto IRAs, there hasn’t been strong enforcement across the states.

“So far, what we've seen has largely been voluntary compliance by employers,” he said. “Whether the states will start to ramp up enforcement going forward, we’ll see. But we are seeing strong participation by employers even without that.”

Positive Outcomes

The panelists also expressed high hopes for pooled employer plans, called PEPs, although again they noted the programs are new and just now catching on. The SECURE Act of 2020 allows employers of any size or industry to band together to create a 401(k)-like plan for their workers. The PEPs can lower administrative costs and fees and generally provide positive outcomes for employees.

“PEPs became available at the right time,” said Zachary Keep, compliance risk manager at Paychex, a human-capital services company that handles payroll, employee benefits and other human resources functions. “It is a very critical piece of the overall access puzzle and brings 401(k)s to folks that historically have been underserved.”

Today, he said, more than 8,000 employers with more than $70 million in assets have joined PEPs.

“We’re not even a year into offering this plan type and interest remains very, very high,” he said, noting that small businesses see PEPs as a way to attract and retain talent, while providing access to retirement savings. “The desire for pooled employer plans has certainly surpassed what I would have expected. It's something that is really changing the game and drawing many employers into the 401(k) space. I anticipate it will continue to grow both in 2022 and beyond.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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