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
401k Specialist is a leading digital media brand and content platform dedicated to educating and empowering financial professionals who work in the retirement planning industry—especially those focused on 401(k) plans and defined contribution (DC) retirement strategies. The company provides insights, analysis, and tools that help advisors, plan sponsors, and other stakeholders make informed decisions to improve retirement outcomes for participants.
At its core, 401k Specialist serves as a trusted resource for news, thought leadership, regulatory updates, and best practices in the rapidly evolving retirement space. Its content spans various formats, including daily articles, newsletters, webinars, interviews, research reports, whitepapers, and podcasts. The editorial team curates and produces content that addresses the complexities of fiduciary responsibility, plan design, participant engagement, investment selection, and regulatory compliance.
The platform also covers emerging trends such as behavioral finance, decumulation strategies, financial wellness, and the integration of technology in plan administration. By staying ahead of legislative and market developments, 401k Specialist ensures that financial advisors and plan sponsors are equipped with up-to-date knowledge to better serve their clients and participants.
Overall, 401k Specialist acts as a comprehensive, go-to hub for those seeking expert guidance and industry intelligence in the retirement planning ecosystem.
Surprise, Surprise, Surprise In a study of Form 5500 data, researchers at Pew confirmed their prior survey results: new state-mandated Roth IRAs would prompt some employers to add a retirement plan without prompting others to terminate their existing plan.[i]
Surprise, Surprise, Surprise!
Employer-sponsored, tax-qualified plans like the 401(k) are superior to state-mandated Roth IRAs. So, if that’s your choice, a state-sponsored IRA or a superior, private sector 401k, what would you do? Increased adoption of 401k plans is news? It should not be news to you because the state-mandated IRAs are suboptimal—they are a poor substitute for IRAs that have been available in the individual marketplace since 1975 (that’s 49 years of contributions), let alone a 401k plan.
See: https://401kspecialistmag.com/how-states-define-success-for-their-ira-mandates/