How some states are helping workers save for retirement

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Hanna Horvath, CFP®

Hanna Horvath, CFP®


Hanna Horvath is a CERTIFIED FINANCIAL PLANNER™ and managing editor for growth at Policygenius. She helps produce the Easy Money newsletter, and owns all growth initiatives for Easy Money. She recently passed her exam to become a CERTIFIED FINANCIAL PLANNER™ in November 2020.

Hanna's work has appeared in NBC News, Business Insider and Inc. Magazine. She is regularly quoted in top media outlets, including CNBC, Best Company and HerMoney. She has also appeared on the Money Moolala podcast and All's Fair podcast.

Prior to Policygenius, Hanna wrote for KNBC in Los Angeles and WNBC in New York. When she isn't writing, she's (often) running, (usually) cooking and (sometimes) doing photography.

Published January 2, 2019|2 min read

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Saving for retirement is important. The most common way to save up for retirement is an employer-provided 401(k) account, according to the AARP. But not everyone has the benefit of saving for retirement this way. Around 35% of private sector workers don’t have access to a retirement plan at their workplace, an analysis by The Pew Charitable Trusts found.

That's changing for workers in states that have started to roll out "auto-IRA." These programs require employers who don't offer 401(k) accounts or other retirement plans to automatically enroll workers in individual retiremnt accounts. Workers can choose whether to opt out.

“It’s really a benefit to the employer, employee and the state,” said John Scott, director of retirement savings at The Pew Charitable Trusts.

How would this work?

In states that offer an auto-IRA, employers who do not offer a 401(k) or similar retirement program will be mandated to enroll their workers in individual retirement accounts and set up payroll deductions to fund the accounts. They aren’t required to match contributions. Workers are also not required to participate.

Small businesses or employers in specific industries, like construction or hospitality, are most likely to use these programs, said Scott. Though the programs are state-based, private financial institutions can bid to manage the plans.

Only about 20% of low-income workers participate in 401(k) plans. Many low earners depend heavily on Social Security when they retire, according to AARP. Programs like the auto-IRA program can help workers get a jump-start on retirement, and soften the need for public funds in retirement.

“The idea is that if we get people to save a little bit out of their paycheck earlier, they may have enough of a cushion to weather the ups and downs of retirement,” said Scott. “Something is better than nothing.”

Which states are participating?

Oregon’s auto-IRA program, OregonSaves, is entering its second year. California and Illinois are implementing plans this year. Vermont, Maryland, New York and Connecticut have approved legislation and are preparing their own programs. New Jersey’s General Assembly has approved auto-IRA legislation, and is waiting approval from the state Senate.

AARP estimates these plans could give retirement coverage to 15 million workers. California's plan alone would cover 7.5 million workers.

Scott said other states are considering offering a marketplace exchange in lieu of an auto-IRA program. States would set criteria and set up a website which would provide comparison shopping. Unlike the auto-IRA, which requires employers to participate, a marketplace would be optional for employers.

When it comes to preparing for retirement, it helps to take small steps to save. Don’t know where to start? Here are five ways to start saving for retirement in five minutes or less.

Image: adamkaz