What is an Auto-IRA?

In October 2021, New York City joined other states in placing a state-run auto-IRA program. Automatic Individual Retirement Accounts or auto-IRAs are a state’s way of bridging the coverage gap for small businesses that cannot afford a retirement plan for their employees by providing a state-run program. These programs help those without a retirement plan think about and save for their future.

Having been created in 2008, only eight states and two major cities participate in these state-run programs:

• California
• Colorado
• Illinois
• Maine
• Maryland
• New Jersey
• Oregon
• Virginia
• Seattle
• New York City

The programs are run by an administration committee that oversees target-date funds, bonds, and other investments.

How does it work?

If the program is in place, they are mandatory, or employees can opt out and choose another retirement plan. If it is mandatory, a business usually has about five to ten employees, and their employer must enroll eligible employees into the program. 

Once enrolled, the employee will set up an automatic payroll deduction. This usually ranges from three to five percent from their paycheck. The money deducted will be put into a savings-based IRA, like a Roth IRA.

According to the Congressional Research Service, state-run auto-IRA programs will have auto-escalation, gradually increasing the employee’s contribution rate to their IRA over a specified number of years.

Advantages & Disadvantages

A state-run auto-IRA program has its advantages. It will allow small businesses to offer retirement programs to their employees, closing the coverage gap that is seen today. It can also be the best way to initiate and automate retirement savings plans without the hassle of finding the right plan for all employees. The enrollment is also automatic, so there is less confusion about the process, the contribution rate, etc.

However, some small businesses choose to research and find their own retirement plans instead of relying on the state. One reason is that not all states offer these programs yet. Only eight states have state-run programs available to employees. Unlike a 401(k), employers cannot contribute to their employee’s plans, so there is no possibility of matching contributions. 

Another big reason to consider is that employees might find better plans for their needs and invest elsewhere. Like many things, basic savings plans are not a one-size-fits-all, and employees may need more coverage or specific coverage depending on their needs and their family.

With states joining the implementation of auto-IRAs, small businesses can begin to weigh their options for either a sponsored retirement plan or a state-run plan. Either option will help close the coverage gap and provide employees with the tools they need to invest in their futures.