Auto IRAs can help more workers save more money for retirement

In 2025, more than 1 million workers saved $2 billion plus toward retirement through state-sponsored automated savings plans. Now, legislation introduced by a Massachusetts congressman would expand this program nationwide. Could this help solve the American savings crisis?

It is well known that American workers are not saving enough for retirement. Almost half of Americans have no retirement savings at all, according to recent surveys by AARP and Gallup. Low-income and older households are most at risk. Dependence on a bankrupt Social Security system is not the answer.

Congressman Richard Neil, a democrat and a ranking member of the Ways and Means Committee, reintroduced the Automatic IRA Act. If passed, it could become a key way for nearly half of the private-sector workforce to begin saving for retirement. The concept is simple, and it works.

Neil was taking a leaf from the book of the 12 states that have already introduced some kind of automatic IRA worker deduction. Although state programs vary in detail, the basic premise is that they generally require employers to enroll employees in a state-facilitated IRA at a preset savings rate. Typically, workers have 3-5% of their paychecks automatically deducted and invested in a Roth IRA. In some cases, contributions are increased each year until they reach 10% of earnings.

The programs are typically available to individuals who don’t receive employer-sponsored retirement benefits. Neil’s new bill would require employers with more than 10 employees who do not sponsor a retirement plan to automatically enroll their employees in an IRA or another tax-deferred plan, such as a 401(k).

Oregon established the first such account back in 2017. Since then, the notion has caught on with saver and employer participation numbers steadily increasing. It took state programs six years to reach the billion-dollar mark, but just 18 months to double it. It helped that the market performance has been stellar. The record stock market rise spurred a 25% increase in savings accounts and higher average savings rates.

Many small business owners don’t offer retirement benefits. Only about seven out of 10 workers in the U.S. have access to either a defined contribution or defined benefit pension plan, according to the Congressional Research Service. That means that 56 million workers can’t take advantage of tax-deferred benefits at work.

The auto IRAs solve this problem. Small businesses that employ service and other workers in high-turnover industries such as leisure and hospitality have struggled to provide retirement benefits to their employees. The automatic IRA program, at least on the state level, provides a no-cost option for employers without the resources or time to offer a private retirement savings plan. The Congressional plan would likewise offer small business employers an auto tax credit, making its implementation cost-free.

Sounds good, doesn’t it, but instilling the desire to save for retirement among workers is a daunting task. Many employees who do have access to plans don’t take advantage of them. Only 56% of all workers and 53% of private sector workers participate in a plan. From my experience, many of those workers chose to spend their paychecks and not worry about the future, especially among those in younger generations. Others don’t want to be bothered or suffer from inertia or confusion.

However, research shows that people are far more likely to save for retirement if they can set aside money automatically, through payroll deductions. I often urged new clients with an employee savings plan to contribute a set amount automatically. Sort of a set-and-forget-it approach.

“But what if I can’t live on what’s left?” they would say. “Give it three months,” I would answer. By then, most workers found that they could adjust quite easily to the 3-5% deduction. What’s more, after making a little money from their investments, the protests quieted down.

In this Congress, some may say there are bigger fish to fry, but that is, in my opinion, short-sighted. Anything that encourages Americans to save more is truly a gift, and something politicians on both sides should be able to agree upon.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires.  Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI).  None of his commentary is or should be considered investment advice.  Direct your inquiries to Bill at 1-413-347-2401, email him at billiams1948@gmail.com, or visit his website at www.schmicksretiredinvestor.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.