As state-run retirement programs become more popular, participants are expected to have $1 billion in savings this year

Whether you have access to a retirement plan through work increasingly depends, at least partly, on where you live.

Within the last decade, 16 state legislatures have adopted retirement-savings programs targeting workers whose employers don’t offer a 401(k) plan or similar option. Some programs are up and running, while others are in the planning stages. 

Some also are voluntary for businesses to participate in. But most require companies to either offer their own 401(k) or facilitate automatically enrolling their workers — who can opt out — in individual retirement accounts through the state’s so-called auto-IRA program.

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“On average, we’ve seen one to two new state programs enacted each year and expect that trend to continue in 2023,” said Angela Antonelli, executive director of Georgetown University’s Center for Retirement Initiatives.

“We should see program assets soon exceed $1 billion, and more than 1 million saver accounts soon in 2023, and then more rapidly continue to grow as other states open,” Antonelli said.

Last year, Maryland and Connecticut launched their auto-IRA programs, joining Oregon, California and Illinois. Colorado and Virginia are expected to do so this year. Others — including Delaware, New Jersey and New York — are still in the planning phases.

Overall, 46 states have taken action since 2012 to either implement a program for uncovered workers, consider legislation to launch one or study their options, according to Antonelli’s organization. 

Although there are some differences in the programs, they generally involve auto-enrolling workers in a Roth IRA through a payroll deduction starting around 3% or 5%, unless the worker opts out (about 28% to 30% do so, Antonelli said). There is no cost to employers, and the accounts are managed by an investment company.

Contributions to Roth accounts are not tax-deductible, as they are with 401(k) plans or similar workplace options. Traditional IRAs, whose contributions may be tax deductible, are an alternative in some states, depending on the specifics of the program.

Among the current auto-IRA programs, workers have amassed more than $630 million among 610,000 accounts through 138,000 employers, according to the center.

Of course, there’s still a long way to go to reach all of the estimated 57 million workers who lack access to an employer-based retirement account.

While you can set up an IRA outside of employment, people are 15 times more likely to save if they can do so through a workplace plan, according to AARP.

Large companies are more likely to offer 401(k) plans. Among employers with 500 or more employees, 90% offer a plan, according to the U.S. Bureau of Labor Statistics. That compares with 56% at firms with under 100 workers.

The auto-IRA programs address that disparity: All but the smallest firms — say, under 10 workers or those that don’t use an automated payroll system — face the mandate to participate or offer their own plan.

It appears some companies are choosing a 401(k) instead: In the one year after the first three auto-IRA programs launched — 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 versus other states, according to recent research from Pew Charitable Trusts.

“We’ve seen a growth of new 401(k) plans in those states that have adopted auto-IRAs,” said John Scott, director of Pew’s retirement savings project. “A lot of employers are saying they’d rather have a 401(k), so in a lot of ways I think the state programs are nudging employers toward offering 401(k) plans.”

Changes at the federal level, enacted as part of the 2019 Secure Act, also are intended to help small businesses offer 401(k) plans. Instead of sponsoring their own plan and taking on the administrative and fiduciary responsibilities that go with that, they can join a so-called pooled employer plan with other businesses — a sort of shared 401(k).

Legislation known as Secure 2.0, which was enacted last month, includes provisions to further enhance the appeal of a pooled plan.

“The idea is to try to fill in the [access] gaps as much as possible,” Scott said.

While Congress has appeared loath thus far to require companies to offer a 401(k), lawmakers did include a mandate in Secure 2.0: 401(k) plans will have to automatically enroll their employees. However, it excludes existing plans, businesses with 10 or fewer workers and companies less than three years old.

There are limitations to the state programs. For example, they do not provide a matching contribution as many 401(k) plans do.

Contribution limits also are lower than in 401(k) plans. You can put up to $6,500 in a Roth IRA in 2023, although higher earners are limited in what they can contribute, if at all. Also, anyone age 50 or older is allowed an additional $1,000 “catch-up” contribution.

For 401(k) plans, the contribution limit is $22,500 in 2023, with the 50-and-over crowd allowed an extra $7,500.

However, Roth IRAs — unlike traditional IRAs or 401(k) plans — also come with no penalty if you withdraw your contributions before age 59½. To withdraw earnings early, however, there could be a tax and/or penalty.

The programs also are partly borne out of necessity. Essentially, states have recognized that doing nothing means risking increased pressure on state-funded social services for retirees who are struggling financially.

“States took the lead to begin to close the access gap,” Antonelli said. “The cost of doing nothing is too great, with significant multibillion dollars in estimated budget and fiscal impacts for many states over the next 20 years due to an aging population that will have little or nothing saved for retirement.”