Could auto-IRAs help households handle emergency expenses?

While state-enrolled auto-IRAs are still a relatively niche movement, with support from just over a dozen states so far, a recent report from the Center for Retirement Research at Boston College asks whether auto-IRAs can help low- and moderate-income households manage emergency expenses.

The research finds that while some workers would tap into these savings for emergencies, many remain hesitant due to concerns about disrupting retirement savings or misunderstandings about penalties.

Auto-IRA programs, which have been introduced in 10 states with another six in the planning stages, aim to increase retirement savings for workers without access to employer-sponsored plans.The movement got an additional push in Rhode Island this past June with Senate Bill No. 2045, which outlines a proposal for the state's very own Rhode Island Retirement Savings Program.

The accounts are structured as Roth IRAs, allowing participants to withdraw contributions tax-free at any time, a feature that could come in handy for those without substantial emergency savings.

Despite that flexibility, barriers remain. The survey, administered to over 3,000 workers earning under $85,000 annually, found that only 10 percent of respondents would turn to their auto-IRA to cover a $400 emergency expense.

Those who chose not to withdraw from their accounts had several reasons, includin a desire to preserve their retirement savings and concerns over potential taxes and penalties.The study highlights that program communication may play a role, as some auto-IRA administrators may emphasize ease of withdrawal while others focus on tax consequences.

Even when workers are aware that they can access their contributions tax-free, many are still reluctant. “Participants may consider funds in an auto-IRA as earmarked for retirement and choose not to take withdrawals,” the report states. Additionally, some workers mistakenly believe that taxes or penalties apply to all withdrawals, not just to investment earnings.

Interestingly, changing how the withdrawal process is framed – researchers highlighted the potential for taxes to one group, while highlighting the ease of the withdrawal process to another – did not significantly affect participants’ decisions to withdraw funds.

However, the group who heard about the easy withdrawal process became more excited about auto-IRA programs, which the report said could help encourage participation. According to the report, 60 percent of respondents who were told about the easy access features felt that having an auto-IRA would improve their financial security, compared to just 48 percent of participants in the other group.

"Since participants are more satisfied when they believe they can access their accounts easily, educating workers about the program’s Roth structure might increase take-up and ultimately lead to more retirement savings," the report's authors said.

According to a database maintained by the Georgetown University Center for Retirement Initiatives, the small but growing state auto-IRA space represents more than $1.7 billion in retirement assets as of August. Ascensus is the biggest fish in the pond, representing $1 billion across the two state programs it administered as of Apil.