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Access to retirement plans through work increasingly depends, at least in part, on where you live.
Over the past decade, 16 state legislatures have adopted retirement savings programs for workers whose employers don’t offer 401(k) plans or similar options. Some programs are in operation, while others are in the planning stages.
Some companies participate voluntarily. However, most companies either offer their own 401(k)s or facilitate automatic enrollment of employees (who can opt out) into personal retirement accounts through state so-called auto-IRA programs. are required from companies.
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“On average, one to two new state programs are enacted each year, and we expect that trend to continue in 2023,” said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University.
“The program’s assets will soon exceed $1 billion, with over one million savings accounts in 2023, and then continue to grow even more rapidly as other states reopen,” Antonelli said. .
Here is the content of the pipeline
Last year, Maryland and Connecticut launched automated IRA programs, joining Oregon, California, and Illinois. Colorado and Virginia are expected to do so this year. Other cities, including Delaware, New Jersey and New York, are still in the planning stages.
Overall, since 2012, 46 states have taken steps to implement programs for uncovered workers, consider legislation to start programs, or consider options, according to Antonelli’s organization. is teaching.
While there are some differences between programs, they generally auto-enroll workers in the Roth IRA through payroll deductions of about 3% to 5% (about 28% to 30%) unless the employee opts out. will opt out, Antonelli said). There is no cost to the employer and the account is managed by the investment firm.
Donations to the Roth Account are not tax deductible as we use a 401(k) plan or similar workplace option. In some states, a traditional IRA, where contributions are tax-deductible, is an alternative, depending on the specifics of the program.
According to the center, under its current automated IRA program, employees have raised more than $630 million from 610,000 accounts through 138,000 employers.
About 57 million people don’t have access to a workplace plan
Of course, we still have a long way to go to reach all the estimated 57 million workers without access to employer-based retirement accounts.
You can set up an IRA outside of work, but if you can do it through workplace planning, your savings potential is 15 times higher, according to AARP.
Large companies are more likely to offer 401(k) plans. According to the U.S. Bureau of Labor Statistics, 90% of employers with 500 or more employees offer his plan. This is his 56% in companies with less than 100 employees.
The automatic IRA program addresses this disparity. For example, all but small businesses with fewer than 10 employees and those without automated payroll systems face the obligation to participate or offer their own plans.
Some businesses choose 401(k) over state programs
Some companies appear to be opting for a 401(k) instead. The first of his three automated IRA programs in Oregon (2017), Illinois (2018) and California (2019) saw a 35% higher growth rate in the first year after launch. The number of new 401(k) plans in private companies in these and other states, according to a recent study by Pew Charitable Trusts.
“We’re seeing growth in new 401(k) plans in states that have automated IRAs,” said John Scott, head of Pew’s Retirement Savings Project. In many ways, I think the state’s programs are pushing employers to offer 401(k) plans.”
Federal Regulations Encourage Businesses to Provide 401(k)s
Changes at the federal level, enacted as part of the Secure Act of 2019, are also aimed at enabling small businesses to offer 401(k) plans. Instead of sponsoring your own scheme and taking on the administrative and fiduciary responsibilities that come with it, you can participate with other companies in so-called co-employer schemes. This is a kind of shared 401(k).
Legislation known as Secure 2.0, enacted last month, includes provisions to make pooled plans even more attractive.
“The idea is [access] We will close the gaps as much as possible,” said Scott.
So far, Congress seems reluctant to require companies to provide 401(k)s, but lawmakers have included mandates in Secure 2.0. A 401(k) plan should automatically enroll employees. However, existing plans, businesses with 10 or fewer employees, and businesses that have been in business for less than three years are excluded.
Restrictions on State Programs
State programs have restrictions. For example, there are no matching contributions like many 401(k) plans offer.
Contribution limits are also lower than 401(k) plans. Up to $6,500 can be put into the Roth IRA in 2023, but high-income earners are limited in what they can contribute, if at all. Also, anyone over the age of 50 can make an additional $1,000 “catch-up” donation.
For 401(k) plans, the 2023 contribution limit is $22,500, with an additional $7,500 allowed for 50 or more participants.
However, unlike traditional IRAs and 401(k) plans, a Roth IRA does not penalize you for withdrawing contributions before you turn 59½. However, withdrawing your earnings early may incur taxes and/or penalties.
Some of the programs are also implemented out of necessity. Fundamentally, the state recognizes that doing nothing means running the risk of increasing pressure on state-funded social services for financially struggling retirees. .
“States have started to take the lead in closing the access gap,” Antonelli said. “The price of inaction is too great. Aging populations with little or no retirement savings will impact the estimated budgets and finances of many states by billions of dollars over the next 20 years.” will be.”