PEW: Most Small Business Workers Supportive of Auto-IRAs. Study after study has found that Americans are woefully under-saved for retirement. Part of that lack of savings is because many American employees — particularly those who work for small and mid-sized private-sector employers — don’t have access to workplace retirement plans. It’s a conundrum for the industry and policymakers alike. How do we overcome the retirement readiness crisis in America if workers don’t have access to the proper tools to save? And if they did have the tools, would American employees use them?
An article from The PEW Charitable Trusts, an independent non-profit organization dedicated to improving government and civic life, cited recent studies that showed that at least 25% of nongovernmental, non-agricultural full-time employees do not have access to an employer-sponsored retirement plan, and fewer than 15% of households contribute to an individual retirement account (IRA).
As such, lawmakers in many states are looking at the possibility of implementing government-sponsored IRAs, known as auto-IRAs, to help these workers bolster their retirement savings. The IRAs are so named because eligible private sector workers are automatically enrolled, and their contributions are deducted from their paychecks and put into an IRA managed by a third party financial firm.
Employees can opt out, and employers are generally responsible only for setting up the payroll deductions and distributing relevant informational materials. The states’ role would be to choose the fund management firm. California, Connecticut, Illinois, Maryland, and Oregon have already passed laws allowing the roll-out of auto-IRAs.
PEW surveyed more than 900 workers without access to retirement plans at small and mid-sized businesses (with 5 to 250 employees) to see what they thought about auto-IRAs. Most workers are on board with the concept. Just 13% said they’d opt out, however, a quarter said they were unsure if they’d participate despite being auto-enrolled. These employees may be more likely to opt out later.
As their name implies, auto-IRAs take advantage of some of the best plan design practices implemented in 401(k) plans to help boost participation and savings rates — auto enrollment and auto escalation. A majority of employees PEW surveyed were supportive of both tactics, with 73% in favor of auto-enrollment, and 68% amenable to auto escalation, where employee contributions are raised a certain percentage annually until it reaches the desired level set by the plan sponsor.
Workers were also generally comfortable with a default contribution rate of 6% of their pay. Workers with previous retirement plan experience seemed more likely to opt out of an auto-IRA. PEW attributes this to the fact that these employees might have other retirement savings or desire a more strictly structured plan.
That state policymakers are looking at ways to help more workers save for retirement — and that we’re putting our finger on the pulse of that population and asking for their input — is positive indeed. It’s important to keep those dialogues going, and even more critical that we make necessary changes in how we provide access to workplace retirement plans so that American workers at companies of all sizes have the opportunity to save and prepare for more financially dignified retirements. Auto-IRAs are an encouraging start.
