Roughly half of all private employees in the United States do not have a retirement savings plan at their place of work, a statistic that has stayed largely unchanged for most of the past four decades. However, governments at the state level across the country are attempting to change that with proposed legislation that would automatically enroll workers into some kind of retirement plan — often an individual retirement account (IRA) — and those efforts are gaining momentum.
This is according to a post by the Boston College Center for Retirement Research (CRR)’s “Squared Away Blog,” which takes a closer look at retirement issues affecting American workers.
“In the past year alone, Maine, Virginia, and Colorado have passed bills requiring private employers without a retirement plan to automatically enroll their workers in IRAs, with workers allowed to opt out,” the post reads. “New York City, which is more populous than most states, approved its program in May. And other states are either starting to implement programs or looking at their options.”
Mandatory auto-IRA programs are already fully operational in Illinois, Oregon and California, the post describes. In those states, workers have saved a total of over $270 million thus far, and are run by an administrator in the private sector and investment manager.
“These mandatory programs are the only practical way to close the coverage gap, because voluntary retirement saving initiatives have never done the trick,” the post explains. “Numerous voluntary plans created by the federal government – such as the Simplified Employee Pension (SEP) – have failed to measurably increase coverage.”
While many private corporations offer 401K plans for their employees, many smaller businesses in industries such as hospitality and food service cannot afford to set their employees up with a 401K plan, or fail to see it as a priority deserving of attention, the post explains.
“Without additional saving, half of U.S. workers are at risk of a drop in their standard of living when they retire,” the post says. “State auto-IRA programs eliminate the administrative burden and expense to employers of a private plan and provide an easy way for workers to save. The money is taken out of their paychecks before they can spend it and is deposited in an account that grows over time. The state programs also permit workers to withdraw their contributions without a tax penalty for emergencies, like a medical problem or broken-down car, if they need the money they’ve saved.”
While a federal program may prove to be a more efficient solution than “a myriad of state programs,” the post says, such an initiative is currently unlikely to materialize due to a whole host of economic and political factors at play.
Read the blog post at the CRR’s Squared Away Blog.