How Auto IRAs Are Helping More Workers Save for Retirement

Research has shown that Americans are far more likely to save for retirement when they can do so through a plan at work, especially one built on automatic payroll deductions.

Yet nearly half of U.S. private-sector workers ages 18 to 64 — about 57 million people — lack access to an employer-sponsored retirement plan such as a pension or 401(k), according to a 2022 AARP study. Low-income, African American and Hispanic workers are disproportionately affected, feeding persistent inequity in retirement security.

With support from AARP, states are increasingly stepping up to help close this gap. To date, 19 states have enacted legislation creating “work and save” programs to directly facilitate nest-egg building for people whose employers don’t offer a retirement plan. 

Most are what’s known as auto IRAs. These programs require most private employers that don’t sponsor a savings plan of their own to enroll workers in a state-facilitated individual retirement account (IRA) at a preset savings rate — typically 3 percent to 5 percent of earnings, automatically deducted from paychecks — and increase the contribution annually (a process called “auto-escalation”), unless an employee opts out.

Sixteen states have enacted auto IRA programs; eight are up and running, and most of the rest are slated to launch in the next few years. While they differ in detail, auto IRA programs are similarly structured state-to-state:

• Participating employers pay no costs and are generally responsible only for ensuring workers can join. They do not make matching contributions. They cannot terminate an in-house retirement plan for the purpose of switching to a state program. 
• Contributions are usually directed into Roth IRAs overseen by state-appointed boards and managed by private financial firms. Roth contributions come from after-tax wages, so withdrawals in retirement are tax-free.
• Employees get a menu of options for investing contributions, generally including a range of target-date funds (TDFs), which tailor their investment mix to the saver’s projected retirement date, and a variety of stock, bond and income funds.
• As with standard workplace plans, enrolled employees are charged administrative fees, which among current programs range up to $30 a year and/or around 0.25 percent to 1 percent of account assets.

A handful of states have adopted different models aimed at encouraging small businesses and nonprofit organizations to voluntarily offer their workers savings opportunities — for example, by choosing a plan through a state-run marketplace or joining with other enterprises in a multiple employer plan (MEP).

As of November 2023, the six state auto IRA programs that were operating by the start of that year (those in California, Colorado, Connecticut, Illinois, Maryland and Oregon) had helped participating workers save nearly $1.1 billion, according to tracking by the Pew Charitable Trusts. But these programs don’t just aid workers, proponents say: They also help small businesses with limited resources recruit and retain talent by making it easy, and cheap, for them to offer access to a retirement benefit.

Here are the programs currently operating or in development and how they work.