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National auto-IRA program would boost U.S. retirement savings

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The retirement savings deficit would fall by $456 billion, according to new research.

A federal auto-IRA program would significantly reduce the U.S. retirement savings shortfall, especially among young workers, according to a new study.

Oregon was the first state to enact an auto-IRA program, in July 2017. The program, OregonSaves, requires all employers in the state that don’t sponsor a workplace retirement plan to automatically enroll employees in a Roth individual retirement account overseen by the state.

The nonpartisan Employee Benefit Research Institute looked at the results if OregonSaves were applied nationwide and found that the $3.83 trillion aggregate retirement savings deficit among American households would fall by $456 billion, or 12%.

“I’d argue that’d have a significant impact,” said John Scott, director of retirement savings at The Pew Charitable Trusts. “That’s a real dent in the overall amount.”

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The impact would be largest for households headed by those between 35 and 39 years old — the youngest cohort that EBRI studied in its sample — whose retirement savings shortfall would be reduced by 16.3%. These savers would have a longer time horizon to save than others nearer to retirement age.

“A ‘national’ OregonSaves plan would provide a significant reduction in retirement deficits … for the youngest age cohort simulated,” according to the report, “What if OregonSaves Went National: A Look at the Impact on Retirement Income Adequacy,” published Thursday.

EBRI studied households headed by individuals between 35 and 64 years old. It assumed that 25% of eligible employees would opt out of the program (which closely approximates the roughly 71% of eligible employees who participate in the OregonSaves program). Oregon’s program also has a default contribution rate of 5% and automatically increases participants’ contribution rate by 1% every year until they reach 10%. Employees can opt out at any time.

Policymakers at the state and federal levels have been trying to solve what’s known in the retirement industry as the coverage gap — the large portion of workers in the private sector who don’t have access to a workplace retirement plan. Research indicates individuals are much more likely to save for retirement if there’s a retirement plan available at work.

Pew estimates that roughly 30% of private-sector workers lack access to a workplace plan.

“There’s lots of room for improvement,” Mr. Scott said.

Several states have passed legislation over the past few years to create automatic-enrollment, payroll-deduction IRA programs for such private-sector workers. Those include California, Connecticut, Illinois, Maryland and New Jersey, in addition to Oregon, whose program was first to begin enrolling employees.

Their plans, while similar in structure, have differences — Oregon’s auto-IRA program, for example, requires employers of all sizes to participate, while Illinois’ plan would cover fewer people since it exempts employers with fewer than 25 employees.

Federal legislation — such as the Automatic IRA Act of 2019, sponsored by Sen. Sheldon Whitehouse, D-R.I., and the Automatic Retirement Plan Act of 2017, sponsored by Rep. Richard Neal, D-Mass., who’s expected to soon reintroduce the legislation — would establish national mandates for employers to offer a workplace retirement plan.

Other legislation, such as the SECURE Act, addresses the coverage issue differently by creating open multiple employer plans — known as open MEPs — which are voluntary structures that proponents say make it more cost-effective for small employers to offer 401(k)-type plans.

EBRI also considered a scenario in which all U.S. employers not offering a workplace plan were required to offer a type of 401(k) plan known as a “safe harbor” plan. The group found that this would reduce the aggregate retirement savings shortfall by 17% — 5 percentage points more than a federal auto-IRA similar to Oregon’s.

One reason for this: The 401(k) plans analyzed would have an employer match, while auto-IRAs cannot receive employer contributions. EBRI modeled an employer match formula of up to 3% of employees’ compensation, and 50 cents on the dollar for employees’ contributions that exceed 3%, but not 5%, of the employee’s compensation. 401(k) also have much annual higher contribution limits than IRAs.