No 401(k) Plan? No Problem, States Offer a New Solution

Imagine not having enough money to live on when it comes time to retire.  Analysts estimate about half of all households in the U.S. won’t have enough saved to keep up their standard of living in retirement.   One way to prevent that from happening is to boost your retirement savings through an employer 401(k) plan.  But what if your employer doesn’t offer one?   In the past, it meant you were just out of luck. Now states are coming up with new ways to help people who do not have access to a 401(k) plan save for retirement.

California Opts In

California is the latest state to require employers who do not offer retirement savings plans to enroll workers in an Individual Retirement Account (IRA). California Governor Jerry Brown, is expected to sign into law shortly, the new Secure Choice plan. Under the plan, employers must put part of an employee’s paycheck into a state-run IRA.  A matching contribution by the company is not required. Employees are automatically enrolled in the plan but can choose to opt out. This is different than most 401(k) plans which require employees to sign up in order to participate.

This automatic enrollment feature is one reason why Steven Sass, economist at the Center for Retirement Research at Boston College, says auto-IRA programs offer the greatest promise for increasing retirement savings especially if workers start to save early.  Sass, a former economist at the Federal Reserve Bank of Boston, says the program’s automatic feature makes saving easy and will increase employee participation.


“If you automatically enroll people into a plan, savings actually go up quite a bit especially for younger workers. So you are not eliminating choice but instead of saying you’re out, unless you swap in…you’re in, unless you swap out.  It’s quite successful,” says Sass.

Who Benefits?

Lower and middle-income workers as well as employees at smaller companies who do not have access to 401(k) plans will likely be the biggest beneficiaries of the new auto-IRA programs.  The details of each state’s plan vary.  Most plans, however, require that companies who have at least five employees and do not offer a retirement savings program be required to deduct contributions from employee paychecks and put them towards an IRA.    Contribution rates taken from employee wages typically start at three percent but will vary depending on the state’s plan and employee preferences.   Employees can contribute up to $5,500 a year and $6,500 a year for those 50 years of age or older.  The annual contribution limit for a 401(k) is $18,000 and $24,000 if the employee is age 50 or older.

The Obama administration has tried to get its own version of an auto-IRA program through Congress but failed.  California and more than a handful of other states are now setting up their own legislation.  Along with California, states including Maryland, Oregon, Illinois and Connecticut have similar plans in the works.  Enrollment and implementation should begin next year.

Sass says these auto-IRA plans will not apply to all workers but he estimates it can help boost retirement savings for millions of people.  “These auto-IRA programs will probably not cover everyone like the self-employed and it will depend on the number of workers an employer has,” he says.  “But this will cover roughly half of the people who are not covered by an employer plan.”

Millions Have No 401(k)

It is estimated that more than 50 million workers nationwide do not have access to an employer retirement plan.  This includes freelance workers, the self-employed and employees of small businesses.  Sass estimates more than 25 million workers could be covered by auto-IRAs.  He says the plans are not perfect.  They do not offer a matching contribution from companies and they have a lower annual savings limit than 401(k) plans.  Sass says, however, auto-IRAs serve as an easy and automatic way for people, who may not otherwise save, to set money aside for retirement and be less dependent on Social Security.

If the auto-IRA plans in California and other states prove to be successful, Sass expects more states to pass their own plans.  He says if many states adopt the plans, a campaign to implement auto-IRA plans could be put into place nationwide.