Will Your State Help You Fill Your Retirement Savings Gap?

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Happy woman thinking about retirement
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If your company offers no retirement savings plans, you’re likely not setting enough money for retirement.

But your state may step into the breach by mandating automatic retirement plans for private sector workers whose employers offer no such savings programs. Five states — California, Connecticut, Illinois, Maryland and Oregon — are leading the way and are scheduled to begin enrollment soon. Others are considering legislative action to help fill the retirement savings gap.

Yawning gap in retirement savings

About half of the U.S. workforce — around 55 million Americans — currently have no employer-sponsored retirement plan to supplement Social Security, says AARP.

About one-third of households end up with no additional retirement coverage from their entire work lives and must rely exclusively on Social Security in retirement, .

In addition, with more people changing jobs every four years, many workers move in and out of coverage so that they end up with inadequate 401(k) balances, the center says.

The median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households, according to National Institute for Retirement Security figures reported by KTVZ in Oregon. The U.S. Government Accountability Office found in 2015 that 29 percent of Americans age 55 and older haven’t saved anything at all.

How the state plans work

While details differ from state to state, auto-IRA programs generally will require employers without workplace retirement plans to automatically enroll their workers in IRAs, with workers typically contributing 3 percent of their earnings, which will be invested by state-administered agencies in Roth IRAs. These accounts take workers’ after-tax dollars. There’s no tax deduction upfront as in a traditional IRA or 401(k) plan, but the money grows tax-free. Also, although billed as mandatory for employers, workers can opt out. Analysts don’t expect many to skip the opportunity, though.

For more on how retirement accounts work, check out: “Roth, Regular IRAs and 401(k) Accounts Made Simple.”

Also on the table are so-called marketplace plans, which are voluntary but let small employers shop for retirement plans under a state-run market, and multiple-employer plans, in which unrelated employers offer 401(k) plans with administrative burdens and fiduciary responsibilities held by a third party.

Who has them, who doesn’t

Where states stand, according to the Boston College center and CBS News:

Auto IRA plans enacted but not launched:

  • California
  • Connecticut
  • Illinois
  • Maryland
  • Oregon

Voluntary marketplace plans enacted:

  • Washington
  • New Jersey

Legislation under consideration:

  • Maine
  • Massachusetts
  • Vermont
  • Virginia
  • Indiana
  • Wisconsin
  • Minnesota
  • Iowa
  • Nebraska
  • Utah

Legislation rejected:

  • Arizona
  • North Dakota
  • Louisiana
  • Ohio
  • Tennessee
  • West Virginia

Opposition to auto-IRA plans comes from people, such as New Jersey Gov. Chris Christie — who said he didn’t want the government involved in the investments but welcomed a marketplace plan — and financial planners and life insurance companies who don’t want the competition.

Would you opt out if an auto-IRA were offered you? Share your thoughts in comments below or on our Facebook page.

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