The Case for State Auto-IRAs: ‘Simplest Avenue’ to Facilitate Retirement Savings

Angela Antonelli

From a small business owner’s perspective, deciding whether to offer a retirement plan comes down to two essential questions: “How much time is this going to take?” and “How much is this going to cost me?” says Angela Antonelli, the executive director of the Center for Retirement Initiatives at Georgetown University.

As small business owners are largely focused on keeping their doors open, many do not have the time or funds to figure out what plans and service providers will suit their employees’ needs. Antonelli says the goal of state-run plans for private sector workers is to help the smallest employers offer a program that is simple, low-cost and easy to execute.

“That being said, the reality is: For some small employers, not offering plan has just been inertia more than anything else,” Antonelli says. For some employers, “it’s not an administrative burden or cost issue; they just haven’t taken the time to make it happen.”

Increased Adoption

The Bureau of Labor Statistics found that 67% of U.S. private sector workers had access to a defined contribution retirement plan, as of March 2023, and 49% chose to participate in the plan, according to an April 2024 report.

Because in states with automatic individual retirement account programs, private sector employers who do not offer a plan are required to facilitate the state program, many employers have started offering those programs to their employees purely because of the mandate.

New 401(k) plan formation has also increased in states that have adopted auto-IRA policies, according to a study recently conducted by the National Bureau of Economic Research.

However, Antonelli says there is still a segment of small businesses for whom the state program is all they can manage.

“[For] populations that might be part time, working different schedules … [or] are not highly paid employees, the reality is, an auto-IRA account is going to be perfectly suitable for those employees,” Antonelli says. “But for other employers, where maybe it’s just been a factor of inertia, they’re now getting pushed to do what they’re honestly capable of doing.”

Developing Track Record

State auto-IRA programs continue to make significant progress; since inception, they have accumulated $1.64 billion in assets and registered about 220,000 employers.

In particular, CalSavers, California’s retirement savings program, one of the first programs created, continues to break new ground: California State Treasurer Fiona Ma announced on August 29 that CalSavers reached $1 billion in assets under management.

CalSavers was created by legislation passed in 2016 requiring employers in California that do not sponsor a retirement plan to participate in CalSavers—an auto-IRA with no employer fees or fiduciary liability. The program is professionally managed by private sector financial firms with oversight from a public board chaired by the state treasurer.

From the pilot in 2019 through July 2024, CalSavers has seen 89.5% of private sector employers in California respond to the call to register for the savings program and more than 519,000 participants have contributed to accounts. There are 50,000 facilitating employers in the program.

Meanwhile, proponents of pooled employer plans, created by the Setting Every Community Up for Retirement Enhancement Act of 2019, have argued that the multiple employer plans are particularly advantageous for small plans, as they provide advantages of scale and typically low-cost investment lineups.

Antonelli agrees that a lot of efficiencies come with PEPs, such as lighter administrative and fiduciary burdens for plan sponsors, but for some of the smallest employers, she says PEPs still bring their technical challenges.

“Keep in mind, the PEP is an ERISA plan,” Antonelli says. “Setting up an ERISA plan [or] a standalone 401(k) is a very different calculus [than a state auto-IRA]. It’s more time-consuming, it’s more administration. There are more costs associated with doing all of that.”

Antonelli notes that there are now more options for employers to set up retirement plans than ever before. The new challenge is for those in the industry to explain these options to employers and for employers to select the right plan type for their business and their participants.

“After we’ve come out of SECURE 2.0, and the industry has been given starter 401(k)s [and] the tax incentives for [small plans], now [the responsibility] shifts to the industry,” Antonelli says. “You’ve been given the tools you’ve asked for. What are you going to do with those, and how are you going to reach out to employers and help them sort through all these options?”