State Auto-IRA Programs Push Small Employers to Adopt 401(k) Plans

As a result of lawmakers in Colorado and Oregon passing state auto-IRA mandates this past year, more small businesses in those states are offering 401(k) plans, according to new research published by payroll company Gusto Inc. 

Compared to neighboring states that did not have automatic individual retirement account mandates this year, the adoption of 401(k) plans and plan participation both increased significantly more in states with mandates, Gusto found. 

Since Oregon Saves first started operating in 2017, state-facilitated retirement savers have amassed approximately $1 billion in total assets across all states offering the programs. Currently, 18 states have enacted one of a variety of state-facilitated retirement savings programs for private sector workers who would not otherwise have access to a retirement account.  

In these plans, the state typically requires employers that do not offer a retirement plan to either enroll employees in the state-sponsored program with a default contribution rate or to offer an employer-sponsored plan, such as a 401(k). This requirement applies to employers of specific sizes, which varies depending on the state. 

Colorado 

For example, in Colorado, lawmakers enacted a requirement that companies with at least five employees participate in a public or private retirement plan starting no later than June 30, 2023. According to Gusto’s data, from one year prior to that date through August 2023, the share of companies with five or more employees offering a 401(k) plan increased to 38%, up from 25.3%.  

In neighboring states that did not have this requirement, such as Arizona, Utah, Nevada, Kansas and Nebraska, the share of small companies offering a 401(k) remained nearly flat, moving to 21.2% from 20.4% over the same period of time.  

According to Gusto, companies in Colorado started adopting 401(k) plans at increased rates ahead of the deadline in early 2023 when the state started reaching out to companies and reminding them that the new requirement was coming.  

“This change in Colorado as the mandate went into effect, coupled with the flat trend in similar states, is strong evidence that these state auto-IRA mandates meaningfully increase firm participation in employee retirement plans,” the report stated.  

A research report published by Pew Charitable Trusts in December 2022 argued that auto-IRA programs are often a catalyst for firms to create 401(k) plans, because there are limitations to state programs. For instance, many state programs do not allow employer’s to make matching contributions as many 401(k)s do. Contribution limits in auto-IRAs are also considerably lower than in 401(k) plans. 

Additionally, Gusto found that employees are taking part in 401(k) programs at increased rates because of the auto-IRA mandates. From July 2022 to August 2023, for example, the share of Colorado employees at firms subject to the mandate who are enrolled in a retirement plan increased to 32.2% from 24.2%. 

Oregon 

Similarly, lawmakers in Oregon passed a mandate that required firms with from one through four employees to participate in an auto-IRA program starting after January 2023. Firms in Oregon with at least five employees were already subject to such a mandate. 

The share of firms with from one through four employees offering a 401(k) plan rose to 11% in August from 7% in January, while neighboring state Washington, which does not have the mandate, saw a much smaller increase in small firms offering 401(k) plans, to 8.6% from 7.7%, over the same time period. 

Who Does It Help? 

Low-income workers are benefiting the most from these mandates, according to Gusto, as rates of 401(k) enrollment have nearly doubled across low-income workers subject to the mandate. Among Colorado workers making less than $15,000 per year, the share enrolled in a 401(k) plan rose to 16.4% from 8.7% between July 2022 and July 2023, and among workers making between $15,000 and $25,000 per year, the share rose to 18.7% from 9.8% over the same time period. 

Providing wider access to retirement savings has been the goal of the auto-IRA program, so Luke Pardue, an economist at Gusto, argued in the report that auto-IRAs present an opportunity for small businesses to improve the financial well-being and retirement readiness of their employees. 

Gusto analyzed trends of 401(k) offerings and participation from payroll data of its more than 300,000 small and midsize business customers before and after state auto-IRA mandates were enacted.