State Auto-IRAs Driving Small Employer 401(k) Adoption

In states with auto-IRA mandates in place, 401(k) adoption among small businesses is increasing significantly, a new study finds.

State auto-IRA programs typically require employers of a certain size—from employers with at least one employee in Oregon to employers with 25 employees in Virginia—to either enroll their employees in a state-sponsored program with a default contribution rate or offer their own employer-sponsored plan, like a 401(k). Seven states currently have auto-IRA programs in operation, and eight states have programs in various stage of implementation.

A new study from Gusto, an HR platform, found auto-IRA compliance deadlines are driving many employers to start offering a 401(k) plan. In Colorado, for example, 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, from 25.3% to 38%. By contrast, neighboring states without an auto-IRA requirement—Arizona, Utah, Nevada, Kansas, and Nebraska—saw their shares remain nearly flat, moving from 20.4% to just 21.2%.

The greatest impact of 401(k) adoption was on small businesses. In Colorado, firms with five to nine employees saw a 52% increase in 401(k) adoption rates, rising from 18.6% to 28.2%. Mid-size and larger businesses saw increases as well, but on a more modest scale. Firms with 10 to 24 employees and 25 or more employees saw 37% and 43% increases in adoption, respectively.

Similarly, in Oregon, the requirement (OregonSaves) that businesses with one to four employees must offer a plan or participate in an auto-IRA program has increased small firms’ adoption of 401(k) plans in the state. Between January and August, the state’s share of firms with one to four employees offering a 401(k) plan rose from 7% to 11%.  Meanwhile, the share of firms with one to four employees offering a 401(k) in neighboring Washington ticked up much more slowly, from 7.7% to 8.6%.

Additionally, participation in these plans is proving to be meaningful, especially among lower income employees. In Colorado, plan enrollment rates doubled among low-income workers at firms subject to the mandate. For workers making less than $15,000 a year, the share with a 401(k) rose from 8.7% to 16.4%, and for workers making between $15,000 and $25,000 a year, the share rose from 9.8% to 18.7%. Rates for higher income employees rose at a slower pace but still increased. For employees making $150,000 or more, participating rose from 60.8% to 69%.

In Colorado, for employees at firms subject to the mandate, retirement plan enrollment increased from 24.2% to 32.2%, and the average monthly contribution was $383. In neighboring states, enrollment at similar firms was down from 20.5% to 18.9%.

SEE ALSO:

• State-Mandated IRAs Not Crowding Out Private 401(k)s: Pew Research

• State IRA Programs Boost Private 401(k) Plan Adoption

• Bridging the Gap: Staring Down the Retirement Industry’s Biggest Challenge