State Auto-IRA Programs Motivate Firms to Create 401(k) Accounts, Research Shows

More employers are offering their own retirement plans in states with mandatory auto-IRA programs, giving a wider swath of employees a chance to save for the future, according to research published by the National Bureau of Economic Research.  

Researchers at the FDIC, the World Bank, Brown University and George Mason University found that the adoption of state auto-IRA programs, and the accompanying mandates that private employers either offer a retirement plan or enroll in the state plan, can actually be a catalyst for firms in those states to launch their own retirement savings plans.  

State auto-IRA programs in California, Oregon and Illinois, for example, have increased by 3% the likelihood that residents in those states work for a firm that offers its own retirement plan and by 33% the probability that individuals are saving in those employer plans, the researchers found. 

In the report, entitled, “How Do Firms Respond to State Retirement Plan Mandates?” the authors used both firm-level data from Form 5500 filings and individual-level data from the Census Bureau’s Current Population Survey to examine the impact of auto-IRA rollout on employer-sponsored retirement plan offerings. 

“Using rich individual-level and firm-level datasets … we find that auto-IRA legislation has a positive and significant effect on the probability of employers offering an [employer-sponsored retirement plan], the probability that an employee is included in an ESRP, and the number of participants in existing ESRPs,” the report concluded. 

Currently, 18 states have enacted a variety of state-facilitated retirement savings programs for private sector workers who would not otherwise have access to a retirement account. Nevada and Vermont are the two latest states to approve such programs. 

A total of seven states now require employers that do not have retirement plans to automatically enroll their workers in an IRA, and others have passed legislation to create similar programs. 

Theoretically, auto-IRA legislation could either increase, decrease or leave unchanged firms’ inclination to provide employer-sponsored retirement plans, researchers argued. For example, firms could terminate a savings plan and enroll workers in the state-created IRA instead. Alternatively, the new legislation could motivate firms to start a plan by imposing administrative costs on employers that do not offer them. 

When evaluating individual-level data, researchers found that individuals in states with an auto-IRA program are 1.4 percentage points more likely to work for an employer who offers a retirement plan during the post-adoption period. 

In addition, when evaluating firm-level data, the probability of a firm offering at least one employer-sponsored retirement plan increases by 0.9 percentage points in states with an auto-IRA mandate, relative to the states without one, after the policy implementation, the report stated. 

While trends in Oregon, California and Illinois cannot necessarily be stretched to apply to all the states that have established or are pursuing voluntary retirement savings plan programs, Kimberly Blanton at the Center for Retirement Research at Boston College wrote that the early results from these states are “promising” and that “auto-IRAs may be an effective way to expand participation in employer-based savings plans.” 

A research report published by Pew Charitable Trusts in December 2022 similarly found that in one year after the first three auto-IRA programs launched in Oregon (2017), Illinois (2018) and California (2019), there was a 35% higher growth rate among new 401(k) plans at private businesses in those states, as compared with other states.  

This likely occurs because there are limitations to state programs, which do not provide a matching contribution like many 401(k)s do. Contributions limits in auto-IRAs are also lower than in 401(k) plans.  

An individual can put up to $6,500 in a Roth IRA in 2023, but higher earners are limited in what they can contribute. In a 401(k) plan, people can contribute up to $22,500 in 2023, with anyone aged 50 or older allowed an extra $7,500. 

However, many believe these state-sponsored programs can help reduce the potential fiscal and economic burdens that states and the federal government will face as larger age cohorts reach retirement age, and they can help close the access gap to retirement savings.