Jake Mahaffey
68 percent of private industry workers have access to retirement plans through their employer according to the 2021 data from the US Bureau of Labor Statistics. The other 32 percent are left to fund their own retirement plans. Some of that 32 percent open their own individual retirement accounts (IRA), others maintain an investment portfolio. Unfortunately, many do nothing. Workers who fail to plan for retirement early in their careers will be forced to delay retirement or turn to the state for social services. This problem is compounded by the fact that seniors are living longer than ever after retirement.
As of 2021, twelve states have addressed the issue by creating auto IRA programs with various levels of implementation. The purpose of these state programs is increasing employee’s retirement savings and enabling them to live independently.
What are Auto IRAs?
Auto IRAs differ from state-to-state, but they generally follow the same principles. Auto IRAs are retirement plans mandated by the state that require automatic enrollment for employees whose employer does not offer a retirement plan. Employees contribute to auto IRAs through payroll deductions, in the same manner they would contribute to a typical 401(k) plan. These contributions are then managed by either the state, or a private investment fund company in contract with the state. An employee will contribute to this fund over the course of his or her career. If managed well, the contribution will have grown substantially over the years. These funds will then be available for the employee in retirement.
It is currently unclear whether auto IRAs are subject to the Employee Retirement Income Security Act (ERISA). ERISA is a set of regulations that employee benefits plans must follow. “Government plans” are exempt from ERISA, but that only applies to plans for government employees, not auto IRAs. Auto IRAs are not necessarily employer plans either, which would normally be covered by ERISA. At one point auto IRAs were exempt from ERISA due to a safe harbor created by the Department of Labor, but that has since been repealed. Because of this, most experts conclude that auto IRAs are not covered by ERISA, though the issue is not settled.
How do Auto IRAs Affect Employees?
Contributions to the auto IRA are automatically deducted from an employee’s pay, just like in a typical 401(k) plan. The key positive about the auto IRA is that employees are automatically enrolled. It is an unfortunate truth that for some, automatic enrollment will be the only retirement “planning” that they do before it is too late. An auto IRA program does some of the planning for them.
The auto IRA is not required though. Employees can opt-out of the auto IRA program if they do not want to participate. Those that intentionally choose to opt-out are then free to fund their retirement in a way that suits them.
How do Auto IRAs Affect Employers?
Auto IRAs apply only to employers with a minimum amount of employees, and who do not provide their employees with any retirement plan options. Employers are not required to contribute to the auto IRA, as is usually the case with 401(k) plans. The only involvement that employers have are basic administrative tasks, such as deducting contributions from the employee’s pay, and distributing information about the auto IRA to employees on behalf of the state. If employers fail to comply with the requirements of the state auto IRA program, they may be penalized.
Luckily for employers, they are not a fiduciary of the IRA fund. Thus, employers will not be liable for poor administration of the auto IRA, if deficiencies were to occur in benefits paid to employees.
How will it be Beneficial to Mississippians?
First off, operating an auto IRA undoubtedly will be costly to the state. However, auto IRAs should be viewed as a long-term investment opportunity instead of a cost.
An auto IRA is beneficial because it will be mostly funded by the individual receiving the payment. That means that payouts to the individual will be equitable to the amount put in over the course of the individual’s career. Hopefully this will encourage the individual to contribute as much as they can. Individual funding will also reduce strain on the state budget.
Insufficient retirement savings will cost taxpayers billions over the coming years. These costs will arise when elders are unable to afford proper health insurance, rent, and transportation due to lack of an adequate retirement income. Most of these elders will have no other choice but to turn to the state to provide these services.
If elders are unable to afford necessities, that means that they will also not be able to afford expendable things, such as eating out, taking vacations, giving gifts, or any other non-necessity. Expendable spending normally sends positive ripple effects throughout the state economy. This creates profits for businesses, and tax revenue for the state. If elders have significantly less expendable income due to a lack of a retirement fund, those positive ripple effects vanish.
An auto IRA will also increase the amount of financial capital available in Mississippi, though the amount will vary depending on what type of investment fund the auto IRA contributions are placed in. It would be doubly beneficial to Mississippi if the state were to create an investment fund that invested mainly in Mississippi businesses. This would help Mississippi bring businesses into the state. Currently, none of Mississippi’s neighboring states, or other competitors such as Florida, Georgia, and Texas, have an auto IRA program. These are the main states that Mississippi competes with for attracting new businesses. An auto IRA fund that invests in the state would hopefully set Mississippi apart from its neighbors.
The elderly population will continue to grow. Implementing an auto IRA now will give Mississippi a head start on the issue of elders who find themselves at retirement age, but without sufficient retirement funds. In a perfect world, employees would open their own IRAs early in their careers, or all employers would offer plans for their employees. Unfortunately, this is not a perfect world so some action must be taken to mitigate the damage. An auto IRA will not completely solve the retirement income problem on its own, but it is a step in the right direction.
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