It is likely that most Americans are not aware that around half the U.S. workforce lacks access to a defined contribution plan such as the 401k. Perhaps surprisingly to some, a significant number of employers, particularly smaller businesses, offer no such plans at all. In short, there exists a retirement plan coverage gap in the U.S.
Many would like to see that gap filled by the automatic IRA, often simply referred to as the auto-IRA. Of course the reason automatic enrollment is encouraged – employees would have the ability to opt out – is because research has found that people are much more likely to start, and stick with a savings/investment plan, if the action(s) required of them are eliminated or minimized.
The Center for State and Local Government Excellence has published a new issue brief, State Initiatives to Cover Uncovered Private Sector Workers, on the private sector retirement savings gap. The Center identifies best practices and conducts research on competitive employment practices, workforce development, pensions, retiree health security, and financial planning. The Center also brings state and local leaders together with respected researchers and features the latest demographic data on the aging workforce, research studies, and news on health care, recruitment, and succession planning on its website.
The brief examines the nature of the coverage problem, the initiatives that states have taken to address it and what the U.S. Department of Labor has done to remove regulatory barriers. Authored by Alicia H. Munnell, Anek Belbase, and Geoffrey T. Sanzenbacher of the Center for Retirement Research at Boston College, the brief’s key findings are as follows:
Four states – California, Oregon, Illinois, and Connecticut – have enacted auto-IRA legislation;
- Two other states – Washington and New Jersey – are setting up voluntary marketplaces to promote low-cost retirement plans to small employers
- Eleven states are actively pursuing legislation
- Seven states were unsuccessful in passing legislation
The authors argue that while the auto-IRA is the most effective state strategy, a national auto-IRA would be a more efficient way to close the retirement savings gap.