Congress Debates Guidance on State Retirement Savings Efforts

This analysis was updated March 20, 2017, to add details from relevant research, including survey data.

Congress will soon decide whether to repeal rules adopted in 2016 by the Department of Labor that clarify how states and some large cities can sponsor payroll deduction individual retirement accounts, known as auto-IRAs, for private sector workers.

In February, the House of Representatives approved two resolutions that invoked the Congressional Review Act (CRA) to block the recent federal regulations. Under the CRA, Congress can repeal the rules if the resolutions have support from majorities in both chambers and the president. The Senate could take up the resolutions shortly.

Most Americans save for retirement through employer-provided plans, but over 40 percent of private sector workers lack access to a plan through their jobs. Over half of states have considered or are considering auto-IRA programs, which automatically enroll eligible private sector workers but allow them to opt out. California, Connecticut, Illinois, Maryland, and Oregon are beginning to implement such programs. Others are debating auto-IRA plans or alternative approaches to helping workers increase their retirement savings.

The Labor Department rules listed specific practices for state-sponsored programs that rely on IRAs to avoid the need to comply with the federal Employee Retirement Income Security Act of 1974, which sets standards for most private sector plans.

Proponents see the auto-IRAs as a way to increase retirement savings while also limiting poverty among the elderly and the need for public assistance. Opponents say these state plans could be overly burdensome for small employers who would have to enroll their workers and for large employers with multistate workforces who could face varying state laws. Some also voice concerns over whether states would have control over the assets in these plans.

The Pew Charitable Trusts has not supported or opposed state efforts to enact auto-IRA plans, but our retirement savings program has produced extensive research on them. For example, Pew recently published results from a survey of over 1,600 small and medium-size businesses to gain a better understanding of the impact that auto-IRA programs might have on the retirement plan market and affected employers.

Small-business owners expressed broad, general support for the auto-IRA concept. When asked about IRA plans funded entirely by employees that use automatic enrollment and pre-determined deductions from pay, 86 percent of employers without plans either somewhat or strongly supported the concept. Many said the main reason for this support was that the auto-IRA plan would help their employees.

But that support varied somewhat depending on which entity served as the program sponsor. Backing for an auto-IRA initiative proved highest if the plan was sponsored by an insurance (72 percent) or mutual fund (82 percent) company; it dropped if a state or the federal government ran the program. Overall, just over 40 percent supported a government-run program.

The analysis also shows that auto-IRA plans probably would not have a big effect on existing employer-provided retirement benefits; 87 percent of executives from small businesses that have plans said they would keep their current offerings if presented with a state auto-IRA alternative, while 51 percent of those without plans said they would start their own rather than join the state’s. These findings probably reflect the likelihood that creating state-sponsored retirement savings programs might have the overall effect of nudging employers that do not currently offer traditional retirement benefits toward doing so.

Compared with the state auto-IRAs, traditional workplace retirement plans permit employers to match worker contributions and have higher tax-free contribution limits. Those features would allow many workers to save more. Pew has found that despite those advantages, small-business owners and executives say they often struggle to offer retirement benefits because of low profit margins or limited administrative capacity.

A separate analysis of state auto-IRA legislation highlights certain key features of these programs. Auto-IRA programs are structured similarly to 529 college savings plans in that they use IRAs offered by private sector financial services firms as the investment vehicles.

As part of these public-private partnerships, the investment firms administering the IRAs would likely interact directly with participating workers. The state’s primary role would be to oversee the partnership and ensure that worker contributions are properly transmitted to the funds. The employers’ role would be limited to ensuring that payroll deductions take place and sometimes to distributing informational material.

Employers are often the point of contact for benefits-related questions, so they can expect employees to ask about the auto-IRA programs. States might consider how best to ensure direct communication between the program and participating employees for general information as well as enrollment and contribution changes, for example, to minimize the burdens on employers.

Establishing an auto-IRA is one of several approaches that states and cities are taking to address inadequate retirement savings, and one of the most ambitious and contentious. Whether and how such initiatives proceed is an important policy debate that has implications for employers, employees, and states’ fiscal soundness. Pew’s work on this subject can help ground the debate in research and evidence.

John Scott directs The Pew Charitable Trusts’ retirement savings project.