Are State-Run IRAs Crowding Out New Plan Formation?

Although the “laboratory” for such analysis is relatively small, and the timeframe for evaluation somewhat limited, there are some early signs to consider.

Industry pundits and policymakers alike have long wondered—and argued—about the impact of state-run automatic IRA programs for private sector workers. Specifically, would employers confronted with a state mandate to enroll workers in a payroll deduction IRA mandatory simply decide to do so, rather than take on the additional work (and potential expense) of a more comprehensive retirement program, such as a 401(k)? Would these state-run IRA programs effectively “crowd out” new plan formation in the private sector—and possible lead to employers with plans walking away from their sponsorship? Or, as anecdotal evidence suggests, would the requirement to consider putting these programs in place spur consideration of the more expansive retirement offering?

Well, a new study by Pew Charitable Trusts based on preliminary data from annual filings to the U.S. Department of Labor by employer-sponsored plans suggests that in states that have created these auto-IRAs, employers with plans continue to offer them and businesses without plans are still adopting new ones at similar or higher rates than before the state options were available. 

These programs have been enacted in Illinois, Oregon, California, Connecticut, Maryland, New Jersey, Colorado, Virginia and Maine—but only Oregon, Illinois and California have begun enrolling workers and putting contributions into the accounts. 

According to Pew’s analysis, since 2013 (before the first state auto-IRA programs were introduced in 2015), the percentage of new plans as a share of all employer-sponsored plans increased nationwide from roughly 6% to nearly 8% by 2019. Pew says that the three states implementing state auto-IRA programs show a similar trend, with the proportion of new plans holding steady or increasing in each. In 2019, for example, Oregon and California had some of the highest proportions of new plan adoption, with Illinois’ proportion just slightly lower than the national average, according to Pew. 

Their analysis also found that during the same period, the percentage of plan sponsors terminating or ending their plans was consistently about 4% of all plans, both nationwide and in the states implementing auto-IRA programs, though the share of plans that were ended began to trend down slightly toward the end of the period: The U.S. average and the proportion of plans terminated in California, Oregon, and Illinois fell to just 3% in 2019, according to the report.

All in all, Pew comments that this (still early) evidence from California, Oregon and Illinois indicates that auto-IRAs appear to complement, rather than undermine, the private sector market for retirement plans such as 401(k)s.

However, while those early results are encouraging,[1] Pew notes that further research and study will be needed to better understand how employers and plan sponsors in states implementing auto-IRA programs respond to such initiatives[2] and if they do so by adopting their own plan or doing away with one they already have.

Footnotes

[1] Indeed, a 2017 survey by Pew Charitable Trusts found strong support among small and mid-sized businesses for automatic IRA programs, multiple employer plans (MEPs) and online marketplaces sponsored by states.
 

[2] Another consideration: The opt-out rates in these state-run programs are significantly higher than among automatic enrollment 401(k) programs in the private sector.