Auto-IRA Momentum Grows as States OK Bipartisan Retirement Laws

Opposition to state-sponsored retirement programs appears to be receding as once-loyal Republican dissenters begin backing business mandates to build nest eggs for almost all private-sector workers.

Delaware in August became the 11th state and fifth in the last two years to enact automatic-IRA legislation, propped up by an overwhelming House vote and unanimous GOP support in the Senate. Republican Pennsylvania State Treasurer Stacy Garrity has endorsed a similar measure drafted by her Democratic predecessor, and red states such as Kansas, Oklahoma, and Missouri have introduced bills of their own.

A tight labor market brought on by the Covid-19 pandemic and the example of successful auto-IRA programs in California, Illinois, and Oregon are fueling the renewed look at state-sponsored retirement plans.

State governments are also staring down the barrel of a burgeoning retirement access crisis that could one day imperil social safety nets. Nearly half of working-age Americans—57 million people—don’t have access to an employer-sponsored retirement savings plan, according to new AARP research.

In the absence of a federal workplace savings mandate, states are spearheading a push to guarantee retirement access. New state-level Republican support in the face of a years-long, multimillion-dollar lobbying effort against employer mandates signals a turning point in that fight, proponents say.

“We’ve established an expanding nationwide movement to finally go after not just the lowest-hanging fruit in the market, but those who have been left behind—whose low wages, financial fragility, and disadvantaged socio-economic status make them the highest-hanging fruit as potential retirement savers,” said Mark Iwry, nonresident senior fellow at the Brookings Institution and a former senior Treasury official who played a role in launching state-based initiatives 20 years ago.

Good Timing

Emlyn DeGannes got used to saving for retirement growing up in a small village in Trinidad and Tobago. Informal cooperative savings programs called sou-sous are common in Caribbean island nations. Partners in the sou-sou each take turns as the recipient of a small share of other members’ monthly earnings.

Money from a sou-sou helped DeGannes’s mother move her family to the US. DeGannes, now the owner of MeJah Books Inc. in Claymont, Del., said she’s struggled to afford and wade through the complexities of an employer-sponsored plan.

“As an employer, you want to do it for your employees,” said DeGannes, a vocal supporter of Delaware’s auto-IRA law. “They are grinding with you six, seven days a week at times, so you want this for them so they can breathe a sigh of relief.”

The Delaware EARNS Act (HB205) requires all businesses with five or more employees to enroll those workers in state-sponsored individual retirement accounts. It’s an almost entirely cost-free retirement savings option for employers. Since the state sponsors the plan, employers’ only responsibility is to disclose employment data, which takes minimal time and effort and can often be automated through payroll software.

More than 13,500 of the state’s 25,000 non-farm private businesses don’t offer any form of retirement benefit, which translates to more than 200,000 workers without access to an employer-sponsored tax-deferral savings program, according to US Bureau of Labor Statistics data.

Covid-19 revealed financial insecurities that forced workers and employers to consider the need for rainy-day savings, said Democratic State Treasurer Colleen Davis.

Davis said timing was critical for getting the bill across the finish line. As her office was trying to get the EARNS project in front of lawmakers in Dover, the legislative session was taken over by bills to hike the state’s minimum wage and enact a paid family and medical leave program. It was difficult to disassociate her project from what appeared to be yet another employer mandate, she said.

Yet the pandemic and a tough labor market combined in such a way that it was possible to craft a savings message that would appeal to pro-business Republicans.

“I think it helped that the environment was a very challenging labor market where folks were short-staffed,” Davis said. “They could not find qualified employees across the board. In some ways, we got lost in the negative noise, but we took our time to build momentum.”

Ultimately, auto-IRA, paid leave, and a $15 minimum wage were signed into law this year in Delaware.

Timing matters in Pennsylvania, where Treasurer Garrity said the pandemic and labor shortages were a primary driver behind her early support for an auto-IRA proposal (H.B. 2156). Proponents behind similar laws in New York and Virginia cited the need to insulate workers against financial shocks, like the pandemic.

Bipartisan Support

Business groups and securities lobbyists staunchly opposed to the auto-IRA model say it threatens to undermine 401(k) markets by encroaching on their business. States such as Illinois and New Jersey with unfunded public pension plan liabilities can’t safely managing workers’ assets, they claim.

A coalition of trade associations and the New Castle Chamber of Commerce lobbied against Delaware’s auto-IRA proposal. A spokesperson for the American Council of Life Insurers, which helped lead that effort, said auto-IRAs aren’t sustainable or cost effective. Plans in California and Oregon have high opt-out rates and have lost millions of dollars to unpenalized withdrawals, the group said.

Chantel Sheaks, vice president of retirement policy at the US Chamber of Commerce, said that although the chamber hasn’t taken an explicit position on auto-IRA programs nationwide, it opposes employer mandates.

“What is making this difficult is the compliance, especially if you’re an employer across state lines, because they’re all slightly different,” said Sheaks.

Yet dire warnings of harm to the 401(k) market or flagrant money mismanagement haven’t been realized, said Angela Antonelli, executive director of the Georgetown University Center for Retirement Initiatives.

“Existing programs have been incredibly successful at growing low- and moderate-income savers, who, quite honestly, the financial industry probably didn’t think were ever going to save for retirement,” she said.

In Delaware, winning the support of state Rep. Ruth Briggs King (R-Millsboro) was key for Treasurer Davis’ office in passing the EARNS Act, because her background in health-care finance helped her facilitate conversations with other GOP allies.

“I think we’re all very sensitive to the struggles small businesses face, and this proposal was something we could do to help them overcome a labor shortage and compete with larger employers,” Briggs King said.

At least 17 states are or have actively considered auto-IRA proposals in the last year, according the Center for Retirement Initiatives.

Garrity in Pennsylvania said she’s committed to reintroducing auto-IRA legislation that failed to make it through a divided legislature this session due to pushback from the National Federation of Independent Businesses.

“Pennsylvania has an aging population, and if we do nothing to help them save for retirement, that’s going to cost the state almost $15 billion between increased state social services or increasing taxes and reduced consumer spending over the next 15 years,” she said. “That’s a huge burden on our taxpayers. My primary job is to be the state’s fiscal watchdog, and that’s what I’m trying to do.”