Michigan State Rep. Mike McFall introduced a bill this week that would create a state-run automatic IRA program.
Under the plan, employees who don’t have access to retirement savings plans through their employer would be automatically enrolled in a Roth IRA. The account would be owned by the worker, who could decide how much to contribute via payroll deduction or opt out of participating. The IRAs would move with workers when they change jobs.
If the proposed legislation is enacted, Michigan would join the 15 other states, including California and New York, that have implemented similar programs in recent years. While these programs are still new in many states, research from Georgetown University has found that, in seven states with active programs, 750,000 savers are saving about $168 per month on average. Even though that sum feels small, these savers have amassed $1 billion in total assets so far.
“We continue to see an aging workforce that is not financially secure enough to retire,” McFall said in a statement. “This program will help small businesses retain employees, allow for more Michiganders to have additional financial autonomy in retirement, and save tax dollars because fewer people will need to take advantage of social safety net programs as they age. The program comes at no cost to employers and will help our state continue as an economic driver in the nation.”
Lack of retirement planning could prove costly to the state over the next couple of decades. According to AARP Michigan, as of 2020, nearly 42% of Michigan’s private-sector workforce between the ages of 18 and 64 lacked access to a retirement savings plan at work. Pew research estimates that insufficient retirement savings will cost Michigan $11.2 billion between 2020 and 2040, mostly from Medicaid costs, plus an additional $37.3 billion in federal tax cost.
For small businesses, the program comes at no cost, and employers are not plan sponsors or legally liable for the accounts. While employers process the payroll deductions, reporting and administration are handled by a firm hired by the state.
Employers can also start their own plans, including a 401(k), to replace the state program. In many states where auto-IRA programs have already been adopted, employers have started their own plans at an increased rate. For example, a recent study found that, in Colorado, lawmakers passed a requirement that companies with five or more employees had to participate in a public or private retirement plan by June 30. Ahead of that deadline, Colorado saw a 45% increase in the share of companies with five or more employees offering a 401(k) plan.
SEE ALSO:
• State-Mandated IRAs Not Crowding Out Private 401(k)s: Pew Research