This 401(k) Alternative Has Helped US Workers Save More than $1.7 Billion

Nearly half of U.S. private-sector workers, approximately 57 million people, lack access to employer-sponsored retirement plans, often because their employers don’t offer them or workers don’t qualify for participation.

This gap has fuelled concerns about a growing retirement savings crisis. However, state-sponsored auto-IRA programs have emerged as a solution. These programs, now active in 10 states with more to follow, automatically enroll employees and deduct savings from paychecks. This significantly increases retirement savings rates among low- and middle-income workers who are less likely to save otherwise.

Introduced in 2017, auto-IRAs allow participating workers to contribute after-tax dollars to Roth IRAs, enabling tax-free growth and withdrawals during retirement. They don’t include employer contributions but may offer access to federal incentives like the Saver’s Credit or the Saver’s Match (effective 2027).

As of October, programs in eight states had amassed over $1.7 billion in savings from 900,000 participants. Analyses show a notable 55% boost in savings rates among low- and middle-income earners, equating to an average of $150 monthly retirement income increase.

Interestingly, these programs may also encourage private-sector employers to introduce their own plans. States with auto-IRAs, such as California, have seen growth in private-sector retirement plans, possibly spurred by businesses wanting to retain control over benefits or to better attract and retain employees.

Federal legislation, such as the SECURE 1.0 Act, has further incentivised small businesses by reducing the costs and complexity of offering plans. Together, these efforts aim to close the retirement savings gap, offering workers and employers alike a path toward greater financial security in retirement.
Source: CNN