To narrow the gap in access to retirement savings in the U.S., the Bipartisan Policy Center argued in a recent paper, state auto-IRA programs alone cannot fully solve the problem.

Because not every state currently offers an automatic individual retirement account program, and because the programs themselves have their limits and challenges, Emerson Sprick, an associate director of economic policy at the BPC and the author of the paper, argued that federal policymakers need to consider ways to address the access gap on a national level.

As of 2020, nearly half of U.S. private sector employees lacked access to an employer-sponsored retirement plan, with 80% of workers who earn less than $18,000 per year lacking access, compared with fewer than 20% of those earning at least $78,000.

A recent survey of more than 700 small businesses, conducted by the Center for Retirement Research at Boston College, found that more than half of small business representatives believe the annual cost of offering a retirement plan exceeds $10,000, and only 7% think the cost is less than $5,000. Sprick says small employers tend to overestimate the cost of offering a 401(k) plan.

Recordkeeping services provider Guideline, for example, offers employers a 401(k) for $89 per month, plus $8 per participant per month—slightly more than $2,000 per year for a 10-employee business. These business owners are also eligible for tax credits of up to $3,000 annually for three years to offset these costs.

Despite the fact that many small businesses are hesitant to offer their own retirement plans, Sprick says state auto-IRA programs have been “immensely successful” in providing wider access for private sector employees, as these programs mandate that employers facilitate a plan if they are not offering their own.

Limitations of Auto-IRAs

However, the BPC pointed out several challenges these programs face.

For example, in two of the earliest programs established, in California and Illinois, 36% and 39% of eligible participants, respectively, have opted to not participate in the state plans, as of August. While these are high opt-out rates, Sprick says it is a positive sign that employees are engaged with the plan.

“Workers are smart and know where their money is going,” Sprick says. “They understand what they can and can and can’t afford. … The pushback to automatic enrollment in general, but especially in plans like these, is that that workers are … going to have no idea what’s going on, [and] they’re going to see a smaller paycheck and then go into credit card debt to pay their monthly bills. What the fairly high opt-out rate is saying is that that’s absolutely not true.”

Sprick argues that one of the biggest challenges to auto-IRA programs is that federal Customer Identification Program rules are preventing more than 2 million Americans from enrolling in auto-IRAs due to failing CIP checks. Sprick says this issue needs to be addressed by federal regulators.

In addition, participants in auto-IRA programs may who accumulate retirement savings may face issues with their eligibility for certain public benefits programs, such as Medicaid, Supplemental Security Income and Temporary Assistance for Needy Families. Many of these programs are limited to those with certain asset levels—less than $2,000 in many cases. But someone contributing only $100 per month to a retirement account would reach that threshold in under two years. As a result, by allowing the default plan design to take effect, low earners could find themselves ineligible for certain benefits.

Sprick says there have been some proposals to increase the asset limits in the SSI program, as they were set decades ago and have not been adjusted for inflation.

Need for Federal Program

In the paper, Sprick also argued that making a significant dent in the access gap will require more ambitious legislation. According to the BPC, it is important for federal policy to prioritize workers with moderate incomes—such as providing access to the Saver’s Match, authorized by the SECURE 2.0 Act of 2022 and due to take effect in 2027—leverage and expand automatic plan features; make it as administratively easy as possible to access a high-quality plan; and invest in education and customer support for employers and the self-employed.

“There’s a real opportunity for some bipartisan momentum on this,” Sprick says.

He also noted in the paper that in 2016, the BPC recommended introducing a nationwide minimum coverage standard to ensure that every employer which has been in business for a certain number of years facilitates access to a payroll-deducted retirement savings plan—similar to how the state programs function.

Developing a successful federal policy, Sprick argued, would require a strong coalition, not only of bipartisan lawmakers, but also stakeholders spanning the full range of interests and priorities.