Availability of presidency auto IRAs seems to enrich the personal retirement provision market
As more states enact retirement savings programs for private sector workers who cannot save from their jobs, policymakers and analysts have speculated about the potential impact on employers: If these state programs would “crowd out” the private market for plans, companies would do so would not do? Adopt your own 401 (k) s or comparable alternatives? Would some employers choose to stop offering their own plans at all? Or, alternatively, could these programs encourage the growth of new plans?
Preliminary data from annual submissions of employer-sponsored plans to the U.S. Department of Labor suggests that in states that have created auto-IRAs, employers with plans continue to offer them, and companies without plans still offer new ones at rates similar or higher than before state options were available. Typically, the government-sponsored individual retirement accounts (IRAs) automatically register workers with eligible employers, although workers can choose to opt out.
The ability to participate in such occupational retirement plans has proven to be one of the most important factors in helping people save for their lives after their work. According to the Center for Retirement Research, very few workers without access to a workplace plan save on their own, for example through traditional IRAs. And an analysis by the Social Security Agency based on tax records shows that about a quarter of private sector workers nationwide do not have access to a plan through their job. The latest full data is from 2015, but the researchers believe there have been no significant changes since then.
Research by The Pew Charitable Trusts, meanwhile, has shown that workers without access to a savings plan are often less paid and more likely to be colored people. Pew work has also shown that non-traditional or temporary workers have lower access rates than traditional workers.
To address these issues, eight states have attempted in recent years to improve access through the establishment of auto-IRA programs, usually state sponsored and privately managed. Employees contribute part of their regular salary; you can increase or decrease the starting amount or decide against participating at any time. The first of these programs was introduced in Illinois in 2015, followed by Oregon, California, Connecticut, Maryland, New Jersey, Colorado, and Virginia.
Oregon, Illinois and California have started enrolling workers and adding contributions to the accounts. These three states are still expanding their programs, but they have all been in operation long enough to provide an indication of employer trends.
Previous research shows general support from small and medium-sized business owners for providing such savings options. In 2017, Pew published the results of a national survey of small business owners and performance managers detailing their views on hypothetical auto-IRA programs. Of those with retirement plans and between five and 250 employees, only 13% said they would give up their program and sign up for such a program if it were introduced in their state.
Of the small and medium-sized employers with no plans, 51% said they would rather start their own plan than include workers in the government-sponsored program. This survey also found a reason why these employers might be induced to adopt their own plans: most of them don’t offer retirement benefits until they are financially stable and already offer other benefits. The availability of a statewide auto IRA could encourage those employers who have the funds but have not chosen to sponsor their own plans.
Early federal data on employer-funded plans in the three states gives a sense of the new landscape and shows employers are making decisions in line with those in other states. Since 2013, before the first state auto-IRA programs were introduced, the share of new plans in all employer-funded plans nationwide rose from around 6% to just under 8% by 2019.
The three states that implement government auto-IRA programs show a similar trend – with the proportion of new plans in each remaining constant or increasing. In 2019, for example, Oregon and California had some of the highest rates of new plan adoption, with Illinois’ rate only marginally below the national average.
Over the same period, the proportion of employers quitting or terminating their plans remained constant at around 4% of all plans, both nationwide and in states, that run auto-IRA programs. The proportion of terminated plans declined slightly towards the end of the reporting period: the US average and the proportion of terminated plans in California, Oregon and Illinois fell to just 3% in 2019.
This early evidence from California, Oregon, and Illinois suggests that auto IRAs appear to complement the private retirement plan market like 401 (k) s. Some employers may be moving toward plan sponsorship in response to the state auto-IRA programs. In the meantime, those who cannot afford their own plans can take advantage of a free, basic austerity program for their workers. More research and study is needed to better understand how employers and plan promoters in states running auto-IRA programs respond to such initiatives, and whether they do so by adopting their own plan or by abolishing one that already exists.
How the Pension Plan Adoption Rates were calculated
The data comes from the federal Form 5500 Annual Reports, a required regulatory filing with the US Department of Labor for sponsors of retirement and benefit plans. These reports are the primary source of information about the operation, funding, and investment of these plans. Pew relied on data from Form 5500 and Form 5500-SF or its short form – typically for plans with fewer than 100 participants – from 2013 to 2019 to provide a comprehensive picture of retirement plans during that period.
Using the benefit codes provided by applicants, Pew could limit screening to employers who offer retirement plans, including defined benefit and defined contribution plans. Plan sponsors only need to submit once per plan, which means that a plan that includes participants in different locations in multiple states would only be represented in the state in which it was submitted. Therefore, there are likely to be plans ascribed to one state that include workers in one or more other states.
In addition, only the data collected up to 2008 are considered complete and will not change. The 2009 data continues to be updated (usually at the beginning of each month). Data from 2013 to 2016 were downloaded in February 2018. 2017 and 2018 data were downloaded in February 2020 and 2019 data were downloaded in October 2020.
John Scott is the director and Theron Guzoto is a key contributor to The Pew Charitable Trusts retirement project.