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Auto IRAs Put Retirement Savings on Autopilot, Offering Hope for Low-Income Workers

For employers, it's a way to help employees save for retirement with little effort and a big payout.

Kim Stegeman does not fit the profile of someone who would normally be featured in a financial planning brochure. She’s the Founder and Executive Director of Rose City Rollers, a roller derby team in Portland, Oregon. “By all accounts, I’m what people would consider a partier,” she says. “I created this very rowdy organization.”

Her parents, however, taught her the value of planning for the future. Stegeman, whose nom de derby is Rocket Mean, bought her first house at 28 and never ran up credit card debt. She and her husband both drive 10-year-old cars. She believes young people are not taught nearly enough about retirement, so she hands personal finance books to friends as presents.

As she was strolling through the gym one day, a woman overheard her talking about retirement savings. The stranger told her about OregonSaves, a pioneering state program that automatically enrolls workers into retirement savings accounts when their employers don’t offer such plans unless they choose to opt-out. Stegeman decided it was a perfect fit for the Rose City Rollers. “While I couldn’t offer a 401(k) package for my employees, I could at least offer them a way to put money away automatically,” she says.

A roller derby team with eight paid employees is not the type of business that has financial firms banging down the door. That’s the whole point. While large companies offer workers retirement plans, small ones often don’t. OregonSaves was designed to fill that gap.

A 15-Minute Setup

Automatic retirement accounts work in ways that will be familiar to anyone who has a 401(k): They put savings on autopilot. Once an employer is signed up, its workers have money automatically deducted — generally, 5 percent of their salaries. The money is saved in a plan chosen by the state but administered by a private financial firm. Once employers have the deduction set up in their payroll software, there’s no additional expense or effort required on their part.

A survey of participating Oregon employers found that 73 percent of them had a positive or at least neutral experience with the program, both in terms of signing up and keeping it running. Stegeman says that it took her accountant about 15 minutes to set it up, using Quickbook. As of April, 277,789 accounts had been established in the state, covering workers at nearly 11,000 employers.

11,000

Number of workers who hold an account with OregonSaves

Oregon was the first state to create an auto-IRA program, back in 2017, but similar programs are now up and running in California and Illinois, with legislation already enacted to create plans in three additional states. These programs will go a long way toward offering retirement savings vehicles to workers who lack access to employer-sponsored plans, built on the premise that low-income workers have both the interest and means to save for retirement if it’s made easy for them.

“Quite frankly, what we're doing in Illinois is we're catching those that the market doesn't want to serve," State Treasurer Michael Frerichs said at a recent conference. "We're serving industries that are more transient, that have higher turnover, that have lower wages, that the financial services industry has just shown no interest in signing up.”

Auto IRAs, as they’re called, are even expected to get a hearing at the national level, with President-elect Joe Biden embracing the idea during the campaign. “I definitely think it will get a hearing in the new administration,” said Richard W. Johnson, who directs the Urban Institute’s retirement policy program. “The administration is committed to trying to bolster retirement security and this is a fairly easy way, at least to start. It doesn’t cost much of anything.”

A Built-In Advantage

Low-income workers, such as those working for fast food outlets or small shops, don’t enjoy the same benefits as people working at big corporations. “At any moment in time, half of the private-sector workers are not covered by a plan at work,” says Alicia Munnell, Director of the Center for Retirement Research at Boston College. “Auto IRAs allow people to have an account they can take from job to job where they default into saving.”

Auto IRAs were built on principles that had already been shown to work in getting people to accrue retirement savings beyond Society Security. Requiring people to opt-out of 401(k)s, rather than needing to opt-in, increased their enrollment dramatically. Auto IRAs are also workplace-based, with money deducted before it hits workers’ pockets. They offer tax-favored treatment for those savings. And they are individual accounts, giving people the chance to chart their own savings and watch them grow.

“They have the advantages of visibility, immediacy, and personal ownership, and to some degree personal achievement in having amassed a growing balance in one’s own individual account,” says J. Mark Iwry, a nonresident senior fellow at the Brooking Institution and one of the architects of the auto-IRA concept.

Auto IRAs allow people to have an account they can take from job to job where they default into saving.
Alicia Munnell Director of the Center for Retirement Research at Boston College.

Bipartisan Support

When Iwry and David C. John, then at the Heritage Foundation, developed the idea back in 2006, it quickly gained bipartisan support. During the 2008 presidential campaign, both Democrat Barack Obama and Republican John McCain endorsed auto IRAs. Because Obama won the presidency, the idea took on a taint among Republicans, but Iwry is hopeful that today’s Republicans will see its advantages. An auto-IRA bill in Pennsylvania has attracted about 40 cosponsors, divided equally between Republicans and Democrats. “Privately, various Republicans have said that this is a conservative idea as much as it’s a progressive idea, if not more so,” Iwry says. “It’s a personal account, managed and invested by the private sector, and the government can’t take it from you.”

Some object to the “big brother” aspect of the state choosing the retirement plans, but these are run by private companies such as Charles Schwab, BlackRock, and State Street Global Advisors. The financial sector in general, which had been at best indifferent to auto IRAs, now recognizes that they represent a large potential market. Hundreds of thousands of people already have money in accounts that they wouldn’t have otherwise, and most of the state plans are just getting started. “Everyone would like to see it move faster,” says Munnell, “but it’s going, and it’s going in a positive direction and the success will build on itself.”

Indeed, Oregon and the other startup states have shown that the idea works. Auto IRAs, potentially involving millions of workers scattered across thousands of companies, are complicated to set up. Once up and running, however, they’ve proven to be user-friendly for both companies and employees. Purely in mechanical terms, there haven’t been any major snafus involving software, management, or defaults. “People tend to accept the default options that they’re given, and that is encouraging,” says Johnson, of the Urban Institute. “It’s hard to object to these plans. It doesn’t cost employers much. It’s just making it easier for workers to save for retirement.”

Stegeman wishes OregonSaves would expand to allow workers to save even more. The auto-IRA might not be enough to retire on, but it has helped her to think about how much more she’ll need while getting her employees used to the idea of putting money away gradually over time. “It’s kind of like the gateway drug of retirement planning,” she says. “The harder it is for people to save for retirement, the less likely they are to do it.”

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