New York City has introduced an “Auto-IRA” at the latest to enroll workers without a job-related retirement plan
Jose Luis Pelaez Inc | DigitalVision | Getty Images
New York City has joined a short but growing list of jurisdictions aimed at getting workers on a retirement plan.
Mayor Bill de Blasio signed a bill this week that would require most employers who do not offer a workplace plan to automatically enroll their employees into an individual retirement account through a city-administered program. While it will take a few years for the initiative to get up and running, the city joins a handful of states that have already made such auto-IRA arrangements or are about to do so.
In addition, a California federal appeals court last week declined a challenge to that state’s auto-IRA program, CalSavers. Essentially, the ruling states that the program does not violate federal regulations on company retirement plans.
“If anything, it continues to give states the incentive and momentum to advance and adopt these programs,” said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University.
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As of 2012, at least 45 states have implemented or considered laws designed to help the estimated 57 million people without access to a pension plan through their jobs, according to the pension center.
While large employers are more likely to offer a retirement option, costs and administrative burdens can stand in the way of small business owners seeking to start one. Hence, these government programs tend to improve, for the most part, access to a job plan for this contingent of workers.
It’s not the only move underway strengthening the ranks of retirement savers. The Safety Act, passed in 2019, made it easier for small businesses to band together to offer their workers a 401 (k) plan through what are known as pooled employer plans. The idea is that companies can participate in the administrative and cost aspects of running a retirement plan.
“The more options workers have, the better,” said Antonelli. “There is a huge one [retirement savings] To fill the void. “
The workers seem to need all the help they can get. For example, the median account balance for those nearing retirement – between the ages of 55 and 64 – is $ 69,000, according to Vanguard.
Part of the hurdle is access. According to AARP, the Advocacy Group for Older Americans, while it is possible to set up a retirement account outside of employment, individuals are 15 times more likely to save for their golden years if they can do so through a workplace plan. Add auto-enrollment and the result is better: The average savings rate on 401 (k) auto-enrollment plans is 56% higher (including employer contributions), research from Vanguard shows.
Three states already have auto-IRA plans: Oregon, Illinois, and California. Although there are some minor differences between the programs, the general idea is that employees will be automatically enrolled through a wage deduction (from around 3% or 5%) unless they opt out. There is no cost to employers and the accounts are managed by a professional investment company.
Several more states are expected to start piloting their own auto-IRA programs this year, including Maryland, Connecticut and Colorado, Antonelli said. In addition, Virginia lawmakers passed law earlier this year approving such a plan.
The more options workers have, the better. There is a huge one [retirement savings] To fill the void.
Executive Director of the Center for Retirement Initiatives at Georgetown University
A handful of other states – including Massachusetts, New York, Vermont, and Washington – have programs that work differently, and participation is voluntary.
Overall, workers in these state programs have amassed more than $ 220 million in retirement assets, the majority of which are in the three states that have auto-IRA agreements, Antonelli said.
For example, OregonSaves, which first launched in 2017, has nearly $ 100 million in more than 100,000 worker accounts. The opt-out rate is around 33%.
For employees ending up on one of these auto-enrolled accounts, it’s important to know how they work and how they differ from the 401 (k) plans that many companies already offer.
For starters, the money withdrawn from your paycheck – assuming you don’t make up your mind – goes to a Roth IRA that is administered by an investment company rather than your state government. Contributions to Roth accounts are not tax deductible, as is the case with 401 (k) plans. (Traditional IRAs, whose contributions may be tax deductible, may be offered as an alternative option depending on the specifics of the state program.)
Meanwhile, Roth IRAs – unlike 401 (k) plans in general – will also not be penalized if you withdraw your contributions before the age of 59.
That is, if an employee wishes to withdraw contributions before retirement, there is no penalty as they have already paid tax on them. (There might be a tax and / or penalty on the income, however.) In other words, the account could more easily become an emergency fund rather than being solely for retirement.
In addition, these Roth accounts generally do not offer the incentive of employer comparison for labor contributions, as is often the case with 401 (k) plans.
The annual contribution limits for Roth IRA are also lower. You can contribute $ 6,000 in 2021, although higher earners have limited, if any, contribution. Everyone aged 50 or over will receive an additional $ 1,000 contribution.
For 401 (k) plans, the contribution limit in 2021 is $ 19,500, with those over 50 allowing an additional $ 6,500.