Automatic IRAs becoming attractive as a savings option
Denise Geske panicked two years ago when her accountant told her about a new Illinois law that would require her to enroll her employees in a retirement savings program.
“As a small-business owner, I felt it was overwhelming,” she said. “I was terrified that I was going to be mandatedto do one more thing.”
Geske, co-owner of Fox & Hounds Salon and Day Spa in Bloomington, Illinois, is closewithherstaffof32. She wanted to give them health and retirement benefits, but since2008, whenshebought the business with her sister, CaseyPirtle, providingthem with a savings plan had felt beyond her reach.
Her concerns were eliminated by Illinois Secure Choice, a state-administered automatic individual retirementaccountprogram begun in 2018. The management and cost hurdles that Geske had assumed the state would make her take on never materialized; the Illinois program, she said, is not complicated or bureaucratic, and she bears none of the cost. Her employees, the savers themselves, pay the fees— butthosearekeptlow by the large pool of participants.
Now every Fox & Hounds worker has access to health insurance and retirement savings.“AndIdidn’thaveto invest a lot of time figuring it out, andit’sfree,” Geskesaid.
Anotherbenefit:Sheisunder no pressure to match workers’ contributions. Federal guidelines prevent anyone other than the individual accountownerfromcontributing to the accounts.
Business owners in other states can eventually expect to navigate some version of Geske’s involuntary education on auto IRAs. Programs arerunninginCaliforniaand Oregon. Connecticut, Colorado andMarylandwillstartsigning up employers in 2021.
NewJerseyhaspassedalaw tobuilditsownversion. And at least 20 states and cities introduced legislation this yeartoestablishprogramsor formstudygroupstoexplore their options, said Angela Antonelli, executivedirector oftheCenterforRetirement Initiatives at Georgetown University.
For all those states and cities, the goal is the same.
The employers of half of private-sector workers in America— 55millionpeople — do not offer a retirement savings vehicle, Antonelli said. Anyone can open an IRA, butAntonellisaidmany workers were unwilling to navigate opening and funding an account on their own.
“State savings plans help address the access gap,” she said.
The programs share similar characteristics. In California, Illinois and Oregon, employersthatdonotoffera retirement savings program like a 401(k) but have more than a certain number of employees must enroll with the state program by a deadline or face a fine (in California, $250 per employee).
Once a business is enrolled, it uses its payroll system to register workers, who can opt out of the savings program at any time.
Paycheck deductions happen automatically and generally start at 5%, with some programs including an annual automatic uptick employees can adjust. Other common characteristics include portability, meaning workers can keep saving in the same plan if they change jobs, and easy access to funds. Auto IRAs are generally Roth IRAs, which are fundedwithafter-taxdollars and typically allow for withdrawals of contributions without penalties.
But critics have surfaced.
“It’s hard to say it’s a bad thing to make a savings opportunity available to people, but I would have preferred that there was morethoughtbehindthem,” said Andrew Biggs, a resident scholar at the American Enterprise Institute, a conservative think tank, andformerprincipaldeputy director of the Social Security Administration.
“As a small-business owner, I felt it was overwhelming,” she said. “I was terrified that I was going to be mandatedto do one more thing.”
Geske, co-owner of Fox & Hounds Salon and Day Spa in Bloomington, Illinois, is closewithherstaffof32. She wanted to give them health and retirement benefits, but since2008, whenshebought the business with her sister, CaseyPirtle, providingthem with a savings plan had felt beyond her reach.
Her concerns were eliminated by Illinois Secure Choice, a state-administered automatic individual retirementaccountprogram begun in 2018. The management and cost hurdles that Geske had assumed the state would make her take on never materialized; the Illinois program, she said, is not complicated or bureaucratic, and she bears none of the cost. Her employees, the savers themselves, pay the fees— butthosearekeptlow by the large pool of participants.
Now every Fox & Hounds worker has access to health insurance and retirement savings.“AndIdidn’thaveto invest a lot of time figuring it out, andit’sfree,” Geskesaid.
Anotherbenefit:Sheisunder no pressure to match workers’ contributions. Federal guidelines prevent anyone other than the individual accountownerfromcontributing to the accounts.
Business owners in other states can eventually expect to navigate some version of Geske’s involuntary education on auto IRAs. Programs arerunninginCaliforniaand Oregon. Connecticut, Colorado andMarylandwillstartsigning up employers in 2021.
NewJerseyhaspassedalaw tobuilditsownversion. And at least 20 states and cities introduced legislation this yeartoestablishprogramsor formstudygroupstoexplore their options, said Angela Antonelli, executivedirector oftheCenterforRetirement Initiatives at Georgetown University.
For all those states and cities, the goal is the same.
The employers of half of private-sector workers in America— 55millionpeople — do not offer a retirement savings vehicle, Antonelli said. Anyone can open an IRA, butAntonellisaidmany workers were unwilling to navigate opening and funding an account on their own.
“State savings plans help address the access gap,” she said.
The programs share similar characteristics. In California, Illinois and Oregon, employersthatdonotoffera retirement savings program like a 401(k) but have more than a certain number of employees must enroll with the state program by a deadline or face a fine (in California, $250 per employee).
Once a business is enrolled, it uses its payroll system to register workers, who can opt out of the savings program at any time.
Paycheck deductions happen automatically and generally start at 5%, with some programs including an annual automatic uptick employees can adjust. Other common characteristics include portability, meaning workers can keep saving in the same plan if they change jobs, and easy access to funds. Auto IRAs are generally Roth IRAs, which are fundedwithafter-taxdollars and typically allow for withdrawals of contributions without penalties.
But critics have surfaced.
“It’s hard to say it’s a bad thing to make a savings opportunity available to people, but I would have preferred that there was morethoughtbehindthem,” said Andrew Biggs, a resident scholar at the American Enterprise Institute, a conservative think tank, andformerprincipaldeputy director of the Social Security Administration.
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