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The Retired Investor: Auto IRAs Can Help 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 Neal, 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.
Neal, representing Western Mass and the Berkshires, 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 percent of their paychecks automatically deducted and invested in a Roth IRA. In some cases, contributions are increased each year until they reach 10 percent of earnings.
The programs are typically available to individuals who don't receive employer-sponsored retirement benefits. Neal'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 percent 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 percent of all workers and 53 percent 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.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His 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 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
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 percent 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.
