Top of Mind

The Skinny on State-Run Auto-IRAs

My colleague, Jeff Snyder, recently interviewed Lisa Massena, Executive Director of the Oregon Retirement Savings Plan. As you may be aware, Oregon is the first state in the nation to roll out a state-run auto-IRA program. The first employers will adopt the program this July, in pilot form. 

Okay, so you may be asking, “What in the world is a state-run auto-IRA program?” As Lisa Massena so eloquently states in the interview, “If a 401(k) and IRA got married, and had a beautiful baby, that would be this program.” A state-run auto-IRA allows (primarily smaller) employers that do not sponsor their own retirement plans to provide a way for employees to save for retirement through payroll deduction. Payroll deduction is a mechanism by which far more employees are likely to save, as opposed to opening an IRA on their own. The state-run auto-IRA program is not meant to be a substitute for employer-sponsored retirement plans (for example, employer contributions are NOT permitted). In fact, by offering an auto-IRA solution for smaller employers, the hope is that someday the employer will “graduate” from the arrangement and transition to a full-blown retirement plan offering.  In Oregon, the auto-IRA will be required for employers who do not sponsor a workplace retirement plan. However, that requirement will be phased in over a period of years, depending on the employer size.

The state-run plan was created in response to some frightening statistics that were discovered by the state of Oregon: an incredible 1 million people (out of a total state population of 4 million!) do not have access to a workplace retirement plan, and the average savings for those nearing retirement is—wait for it – $12,000! Let that sink in for a second: the average savings for those nearing retirement in Oregon in $12,000. Simply stunning, in my opinion. Apparently, other states have uncovered similar statistics in their research, since approximately 20 states have either approved a state-run auto-IRA program or are in the process of approving one, according to Ms. Massena.

As the interview states, while Oregon has worked quite diligently for several years to establish this program, they did not need a new federal law for state-run auto-IRAs to become a reality. Do any of you remember payroll deduction IRAs? I do, which probably means I am old! At any rate, back in the 1970’s the DOL allowed payroll deduction IRA programs to avoid ERISA, as long as employee participation was completely voluntary.

To this day, such plans have never taken off, due partly to the fact that small employers still had to go through the process of selecting an IRA program provider and establishing a program with that provider. A state-run plan, which is essentially a payroll-deduction IRA on steroids, eliminates that step. State-run programs will presumably contain other advantages over payroll-deduction IRAs, such as reduced administrative costs and less work on the part of an employer to establish and maintain.

If you wish to read more details regarding such programs, Christine Roberts, who has been previously featured in Top of Mind, has an excellent piece on the subject in her E is for ERISA blog.  

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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