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State Programs, Federal Incentives Spur Rise in 401(k)s

Employee demand in tight labor market also driving growth in workplaces offering retirement savings benefit

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Business is booming at Guideline, an Austin, Texas–based company that administers employee retirement savings programs for mostly small and midsize businesses.

Since 2020, Guideline has nearly quadrupled its client base to some 38,000 companies, says Jeff Rosenberger, the firm’s chief operating officer. Of the more than 14,500 new clients signed up last year, 90 percent were offering their workers a retirement plan for the first time. 

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“We are riding a market wave of 401(k) plan development and adoption,” Rosenberger says. He links the growth to a proliferation of incentives for companies to set up plans, including new state requirements, changing federal policies and growing employee demand in a competitive job market.

The trend could have a significant impact on U.S. workers’ ability to build financial security later in life. About 57 million people — nearly half of the country’s private-sector employees — do not have access to a traditional pension or a retirement savings plan at work, according to a July 2022 AARP report.

The retirement savings gap is especially acute among small-business workers, the study found. Over three-quarters of workers at firms with fewer than 10 employees, and nearly two-thirds of those at companies with 10 to 24 employees, lack access to a retirement plan.

States expanding “auto IRAs”

One factor shifting the landscape for workplace plans is the emergence of state programs designed to provide retirement savings options for employees who don’t have access to a 401(k) or traditional pension.

AARP has championed these programs, which to date have been enacted in 16 states. Most involve “auto IRAs,” which typically require employers of a certain size (for example, those with at least five employees) that don’t offer their own retirement savings option to enable workers to save through a state-sponsored program, via payroll deductions to an individual retirement account

“We know that 57 million Americans work in jobs that don’t offer a way to save for retirement. When states step up and provide a way to save, we see the financial security of these workers improve,” says Jessica Eckman, an AARP government affairs director focused on retirement savings issues. 

As of January 2023, auto IRA programs up and running in six states — California, Colorado, Connecticut, Illinois, Maryland and Oregon — had enrolled more than 600,000 people, according to data from the Pew Charitable Trusts. Six more states are working toward implementation of auto IRAs. 

Contrary to concerns that the state programs would discourage employers from establishing or maintaining workplace plans such as 401(k)s, they appear to be spurring growth in the private market, according to a December 2022 Pew study.

Researchers found that in the first year after Oregon, Illinois and California launched auto IRAs, businesses in those states started retirement savings plans at a 35 percent higher rate than in states without automated savings programs. 

Moreover, employers in those three states terminated existing workplace plans at the same rate, or more slowly, than the national average, the study found.

Ripple effect

“It looks very much like these programs are nudging private businesses to make a choice,” says Kim Olson, senior officer for the retirement savings project at Pew. “I think what we’re seeing is that many employers decide to go ahead and start an employer-sponsored plan in lieu of using the state program.”

Mark Iwry, a former Treasury Department senior adviser and currently a nonresident senior fellow at the Brookings Institution, says it’s “no surprise” that the state programs are having a positive ripple effect on small businesses.

From the start, auto IRA programs were designed “to support and enhance the private pension system,” says Iwry, who pioneered the movement to create state-based savings programs and coauthored the auto IRA concept with David John, a senior policy adviser at the AARP Public Policy Institute.

Iwry attributes the growth in new plans to both “public marketing of retirement savings” by the state programs and the “action-forcing deadlines” they set for small businesses to start facilitating automatic enrollment of workers in IRAs unless they instead sponsor an employer plan. 

“We intended auto IRAs to spur adoption of new private-sector 401(k) or SIMPLE IRA plans by engaging plan vendors to say, ‘Now that the state’s gotten your attention to the importance of helping your employees save, why not just meet their deadline by buying a 401(k) from us,’ ” he says. 

SECURE Act impact

Rosenberger, of Guideline, says recent federal legislation that created incentives for companies to establish retirement savings plans for their workers is also having an impact.

The SECURE Act, passed in 2019, provided tax credits to small businesses that start a workplace plan and introduced pooled employer plans, or PEPs, which allow unrelated companies to participate in a single 401(k) managed by a third party. 

SECURE 2.0, a follow-up measure signed into law in December 2022, offers additional sweeteners, including enhanced tax credits and an option for individual companies to create “starter” savings plans that are less costly or complicated for employers to operate but satisfy state auto IRA requirements. 

SECURE 2.0 will also require companies and organizations that start new 401(k) and 403(b) plans to automatically enroll employees and annually increase their contributions, unless the worker opts out. AARP supported both SECURE bills. 

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The two measures create business opportunities for companies that provide retirement plans to reach more employers who currently do not offer their workers a savings option, says Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University.

“There’s a lot that has been given to the industry in these SECURE Act reforms that they’ve asked for in terms of incentives and plan design features to offer more products and options,” she says. “Only time will tell if we see a real increase in the total number of employers offering retirement plans to their employees.” 

Fidelity Investments, one of the largest providers of corporate retirement plans, has seen its 401(k) business tick up in recent years, from just under 23,000 plans in 2018 to 24,500 last year, covering 22 million workers (although a company spokesperson says the growth could reflect Fidelity increasing its share of the existing market as well as businesses offering new plans).

In combination with the proliferation of state-run plans and “an extremely tight labor market,” SECURE and SECURE 2.0 “have challenged small business owners to differentiate themselves to employees and candidates they want to attract,” says Kristen Peterson, vice president for thought lLeadership at Fidelity. 

“Many that don’t currently offer benefits are now looking at the value a workplace retirement plan can provide employees and their business.”

Millennials drive demand

Rosenberger agrees that companies navigating the competitive labor market are responding to rising demand for workplace savings options — particularly by millennials, now the largest generation in the U.S. workforce.

“There’s an expectation among millennials that a retirement plan of some sort would be included in their benefits package,” he says. 

AARP Research has found that Americans are about 15 times more likely to save for retirement when they have a workplace plan and 20 times more likely to do so if contributions are automatic. Private workplace plans also allow people to save at a greater rate than do IRAs, thanks to higher contribution limits and employer matching contributions.

Under IRS rules, employees enrolled in a 401(k) or similar plan at work are permitted to contribute up to $22,500 in the 2023 tax year — $30,000 for those 50 and over. IRAs have much lower contribution limits: $6,500 this year for savers under 50, $7,500 for those who are older. In addition, workplace plans can be fattened by matching dollars from employers.

“This is going to shrink the [savings] gap significantly if we can get wide adoption across the United States,” Olson says of the trends toward more workplace plans and more state-facilitated programs. “It’s just really making sure that everyone has access to retirement savings.”

“There has been a good start in increasing coverage,” says John, of the AARP Public Policy Institute, but “there is still a long way to go, and more states and employers need to act.”

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