Auto-IRAs Promote Secure Retirements

In 2018, as one of the youngest members of the Washington state House of Representatives (she was 38 at the time), Kristine Reeves began advocating for ways to help her generation of Americans do what she hadn't yet done herself—start saving regularly for the long-term future.

As a late-millennial, Reeves recalls having grown up “without a lot of financial literacy” and thinking she was pretty far behind in her retirement savings journey. So she explains that one of the first things on her mind after she got elected was, “What can I do to support the up-and-coming generations advance their retirement security?”

Reeves was attracted to an idea the neighboring state of Oregon had recently started to enable workers at companies that didn’t offer pensions or 401(k) plans to still gain access to retirement savings at work.

In Oregon, employers who don’t provide these resources are required to enroll workers in a state-facilitated Roth IRA program. The employer only has to withhold a designated sum from each worker’s pay—the state oversees the process—and ensures that the funds are routed directly from employers to professional investment managers who invest them.

The key provision is that employees are automatically enrolled unless they take deliberate action to opt out, which has resulted in a high rate of savings. These programs have been nicknamed auto-IRAs.

Reeves became chief sponsor of a bill in the Washington state House to enact Washington Saves, an auto-IRA program similar to Oregon’s. On March 28, Governor Jay Inslee signed the bill into law. After a trial period for testing and public education, it will become available across the state in 2027.

As Reeves sees it, “the economy is not working for my generation, and it’s not working for a variety of reasons.” But one of them doesn’t have to be a lack of retirement savings opportunity, she says.

Reeves calls Washington Saves a landmark for workers her age and younger, who often switch jobs (their savings can travel with them to a new job), who likely don’t have access to a pension plan, and who worry that Social Security will be gone by the time they get to retirement.

Since Oregon began its program in 2017—the first in the nation—10 states have implemented auto-IRA programs, and Washington joins six other states that have passed legislation to do so.

The Pew Charitable Trusts, which has long promoted auto-IRA programs and has watched them grow in popularity, views automatic investment as a partial answer to a looming retirement crisis in the United States. Pew has helped guide states through the process by providing data, analysis, and technical assistance that helps them design automated savings programs to best fit the needs of their employers and workers. Pew’s research shows that when workers are more financially secure, they will be less reliant on taxpayer-funded government programs, better able to withstand financial shocks, and more likely to save for their future.

“Americans by and large are not ready for their own retirements,” says John Scott, who leads Pew’s retirement savings project. “Nationwide, 56 million private sector workers lack access to retirement plans at work. Many Americans face a declining standard of living in old age, so we need to find solutions like auto-IRAs to address that issue.”

Research shows that people who have access to retirement savings at work are 15 times more likely to save than people who do not. In just eight of the states with auto-IRA programs—Oregon, California, Illinois, Connecticut, Maryland, Maine, Virginia, and Colorado—915,000 active savers have accrued investments of $1.7 billion.

Employees of small companies are often low-wage workers. Pew found that the average monthly contribution to auto-IRAs is just $165, so it will take time for workers to build sizeable nest eggs. But as Reeves says, “It’s a start.”

Still, about half of U.S. workers lack access to an employee retirement savings plan, says David C. John, senior strategic policy adviser at the AARP Public Policy Institute. Thirty-three states have yet to adopt auto-IRAs, but John hopes that most—or all—will eventually do so.

Lexie Swall for The Pew Charitable Trusts

In 2006 John, then at the Heritage Foundation, joined with J. Mark Iwry of the Brookings Institution to publish the first proposal for auto-IRA programs. Their thinking was that the federal government should be involved, but the work so far has fallen to the states.

“The proposal was developed through the Retirement Security Project at Brookings, which was funded by Pew,” John says.

Opposition arose from the insurance industry, which John says viewed state-facilitated retirement programs as impinging on private sector profits in retirement plans that their companies offered.

“They were absolutely convinced that this was contrary to their interests, and they very strongly lobbied against it,” John says. “There was other opposition, too, from employers, small-business associations, chambers of commerce.” 

When auto-IRA plan advocates were able to make a strong case that these state-run plans would not compete with private plans, the insurance industry opposition diminished, says Tobias Read, the state treasurer of Oregon.

“We told the insurance industry, with research help from Pew, that a high volume of low-balance accounts is not going to be profitable for you,” Read says. “We said, ‘Let us take them on for you. In the long run, those are your future customers. We suspect a lot of people are going to graduate from these very basic, no-frills accounts, and they will roll over and become your customers.’”

That, indeed, is happening. Many companies that started with auto-IRA programs have upgraded to 401(k)s, a type of plan that allows employers to also contribute to employee accounts that are tax-deferred, meaning the employees pay the income tax when they withdraw money in retirement (these accounts also incur penalties for any withdrawals before the age of retirement). 

Pew analyzed data from the U.S. Department of Labor and showed that, in states with auto-IRA programs, the number of employers offering 401(k) and similar plans is higher than before state options were available.

Roth IRAs do not permit employer contributions, but because they are made with an employee’s after-tax dollars, they have no future tax payment and workers can choose to withdraw funds before retirement age for an emergency, for a car loan, for any reason at all. This freedom has encouraged workers not to fret about tying up their assets.

“I think it’s a big selling point for workers—the notion that they have control over the funds and that they can pull out their contributions without a penalty,” AARP’s John says.

For many employers, especially the smallest ones, these state-facilitated programs are still the best option.

In Oregon, Read says, 130,000 workers have accrued about $300 million in investments over the seven years of OregonSaves. He calls it a great success but notes it’s also “hardly a job completed.”

Other opposition to auto-IRA programs has come from people who don’t believe it is the business of states to help provide for retirement. But that opposition has been somewhat muted by research projections showing that unless states help workers save now, they will be forced to aid needy retirees of the future with costly social safety-net programs.

“If people aren’t saving enough, they’re going to run short in retirement even with Social Security, and some will need public assistance,” Pew’s Scott says. “Over a 20-year period, the cost to the 50 states is $334 billion—that is the fiscal cost of insufficient retirement savings.”

Colleen Davis, the state treasurer of Delaware, says that even in her state—the nation’s smallest in population—the cost of not helping workers save for retirement could add up to $1.1 billion. That amount is equivalent to about one-sixth of the state’s current annual budget.

Delaware in 2022 enacted an auto-IRA program—Delaware EARNS—that applies to private companies with five or more workers. A pilot program ended in October, with the launch of a statewide requirement for employers to participate in the program.

Unless they opt out, Delaware workers will be initially enrolled at 3% of their pay. That will increase by 1% per year until they hit a maximum of 10%. By federal law, annual contributions to Roth IRAs may not exceed $7,000.

“You have to make it easy and painless,” Davis says. “If you start off at a low percentage and you increase it over time, you are preparing people for retirement without a ton of pinch.”

Savings will be invested in mutual funds and ETFs (exchange-traded funds, a type of pooled investment) composed of stocks and bonds, Davis says, and employees will have three options for how much risk they want to take.

Bipartisan support is on the rise, Davis notes. A Democrat, she says that “once I started talking about the amount of savings that the state might have, that’s when it really started to make sense to Republicans.”

Through early employer focus groups John and Iwry found that business owners, on first hearing about auto-IRA proposals, were concerned about the potential cost and hassle. Some viewed the programs as yet another burdensome government mandate. The reality, John says, is that the plans have proved to be of little cost and low hassle.

“We heard from employer focus groups that employers want to offer retirement programs to attract and retain workers—but also because it’s the right thing to do,” Scott says. “They see their employees every day. They get to know them, and they are concerned about their being financially secure. A lot of them said, ‘I can't afford my own 401(k) and I really don’t have the time to run it. But if there's a solution that is no-cost and very little burden, I will support it.’”

Jill Nelson, owner of Hot Diggity!, a dog-walking and pet-sitting service that operates in both Portland, Oregon, and Vancouver, Washington, says she found the OregonSaves program “very easy to use.”

Her employees like it, she says, because they don’t have to be bothered with details. They are signed up as a matter of course, so investing becomes automatic.

“There is a form of inertia,” Nelson says. “If your employer is taking out the money for you and you don’t have to do anything, the momentum makes it easier for you to continue doing it.”

Because she has employees in two states­—and Washington’s program isn’t available yet—Nelson decided to upgrade her plan to a 401(k). “I wanted all of my employees to be able to save,” she says.

In Delaware, business owner LaVante' N. Dorsey volunteered to be part of the state’s pilot program. She runs LaVante' N. Dorsey & Associates, which provides therapeutic, motivational, and goal-oriented services to women.

“We are in a retirement crisis where a lot of people aren’t planning and saving for retirement,” she says. “So I think it’s great they are being proactive and trying to get ahead of it.

“As a small business, you look at the benefits that larger businesses are able to offer—health insurance, retirement, all of that—and you ask yourself, ‘How do I even think about doing that? I don't even understand how you do it.’”

Working with Delaware EARNS, however, has proved easy, Dorsey says. “Just a little bit of my time. Outside of that, it’s not costing me anything. If I didn’t take advantage of it as a business owner, I'd be out of my mind.”

Tom Infield is a longtime Philadelphia journalist and frequent contributor to Trust.