State Auto IRA Impact
Over the years, several states have developed automatic enrollment retirement plans. While the terms vary from state to state, most programs require that employers automatically enroll their employees in the state program at a set deferral rate if the employer does not sponsor their own retirement plan. Often, auto enrollment begins at a 5%-of-compensation deferral rate and the rate escalates over time until it reaches a fixed ceiling. Employees have the ability to opt out or set their own deferral rate.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about whether state-level automatic enrollment IRAs are having a positive impact.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Bloink: State-level auto IRA programs automatically enroll taxpayers in retirement plans if the taxpayer's employer does not offer their own retirement plan. This auto-enrollment mandate always means that more taxpayers are going to be contributing to their own retirement plans. Anything we can do to increase the private retirement savings levels of taxpayers is going to be a positive.
Byrnes: Much could be done to make these state-level auto enrollment programs more valuable. Currently, they're often structured as Roth IRAs, so contributions are made on an after-tax basis. For most taxpayers, a pre-tax contribution would be more valuable, generating current tax savings and giving taxpayers a stronger incentive to remain enrolled in the plan instead of opting out.
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Bloink: Of course, taxpayers always have the opportunity to opt out of an auto enrollment program, but we have to consider the fact that it requires an affirmative action to opt out. The reality is, most taxpayers are going to elect to continue participating because that requires zero action on the part of the taxpayer thus increasing the level of retirement savings among taxpayers who otherwise would not have easy access to a retirement savings vehicle.
Byrnes: Under most auto enrollment plan terms, it's currently impossible for a taxpayer to roll over the funds in state-level plans (at least in the case of Calsavers, the largest state-level auto enrollment program) into an employer-sponsored 401(k) if the employer begins offering a plan or the individual obtains employment with a business that offers a 401(k) plans. Roth IRAs simply can't be rolled over into an employer-sponsored 401(k). Taxpayers who do choose to participate are thus stuck with a myriad of retirement accounts that they're more likely to forget about.
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Bloink: The Roth option is often chosen by states for administrative convenience. We have to respect the choice to eliminate the administrative burden that would be created were employees given a choice between different types of plans. Roth IRAs also offer a valuable source of future tax-free income, thus making it more likely that more taxpayers will retire with a diverse set of accounts from which to draw retirement funds.
Byrnes: Were taxpayers given the option of choosing the type of plan they'd like to fund, they would be much more likely to remain enrolled in the state plan. As currently structured, it's almost as though they have an incentive to opt out so that they receive the current benefit of their full compensation—when the plans could be structured as pre-tax vehicles that also offer an immediate benefit to taxpayers who are least likely to take proactive steps to obtain their own IRAs.