The good business of saving for someone else's retirement

As a growing number of state-facilitated retirement plans are implemented across the country, offering more robust employee benefits could benefit your business’s bottom line.

The auto-IRA. It started as the product of an unlikely collaboration between the Brookings Institution, a government think tank often described as liberal, and its conservative counterpart The Heritage Foundation.

In 2006, leaders from both organizations introduced the savings tool, which is funded by automatic payroll deductions, as a national policy proposal aimed at addressing the looming retirement savings crisis.

The idea didn’t gain broad federal support. About 10 years later, however, it would become a reality – at the state level.

According to the Center for Retirement Initiatives, part of Georgetown University’s McCourt School of Public Policy, there were 19 state-facilitated retirement savings programs with $1.5 billion in assets, as of May 2024. While not all of the programs operate as auto-IRAs or even for the same audience – for example, California runs an IRA for businesses with one or more employees, while Massachusetts offers a voluntary multiple employer plan for small nonprofits – they share a common goal: making it easier for mid-sized and small entities to help their employees save for the future.

The benefit of benefits

Approximately 57 million Americans lack access to traditional pensions or retirement savings vehicles through their employers. This figure, reported by the AARP in 2022, represents nearly half of all private sector employees.

In the race to close the retirement savings gap, business owners are in a unique position to help would-be savers gain ground – and to strengthen their own foundations in the process.

In a survey of small businesses conducted by The Pew Charitable Trusts, respondents who offered plans cited attracting and retaining talent and positively impacting employee performance as primary reasons for adding a saving option to their benefits packages. Employees themselves seem to confirm it’s an effective approach, with a report from digital savings platform Vestwell indicating a supermajority of respondents – 98% – see a retirement plan as “an expectation, not an exceptional perk.”

Alongside the stabilizing effect retirement plans can have on a business’s org chart, there are also tax benefits when employers elect to launch their own plans. The SECURE Acts of 2019 and 2022 increased tax credits for eligible employers starting plans to as much as $5,000 per year for the first three years of the plan. Additionally, SECURE made employer 401(k) matches tax-deductible.

And of course, with stability and savings, there’s also the opportunity for business owners to participate in these plans themselves.

The state of things

While small businesses represent a powerful potential solution to the retirement saving crisis, just 34% currently offer plans. State-facilitated programs were developed and introduced with the goal of giving business owners a turnkey way to bring that number up.

According to the Center for Retirement Initiatives, founded in 2014 with the mission of encouraging states to enact plans in the absence of federal action, state programs are uncomplicated and well-supported by design with the goal of making adoption simple. The vast majority operate auto-IRAs, which are Roth IRAs. Roth allows savers to make after-tax contributions, while the traditional model is funded by pre-tax dollars. The maximum contribution to both types is $7,000 in 2024, $8,000 for those 50 and older.

But even in the states where they’re most successful, these retirement savings plans are far from the only – or even the best – option.

Despite some concern they would do the opposite, state-facilitated programs have spurred a rise in marketplace competition, actually driving the creation of 401(k) and other private plans. One Pew Charitable Trusts study found that after introducing a state program, businesses in Oregon, Illinois and California launched savings plans at a 35% higher rate than in states with no program. And with their higher contribution limits – $23,000 pre-tax in 2024 – 401(k)s in particular offer a more potent option for employers looking to support savers.

“If you go back to the inception of the auto-IRA, one of the goals was to enhance the retirement savings opportunities,” said Don MacQuattie, head of the Raymond James Institutional Fiduciary Solutions team, which supports advisors who serve clients with retirement plan needs. “And it’s clear today that the private sector is benefiting from the existence of the state programs. More importantly, a larger number of previously uncovered workers now have the ability to participate in workplace savings.”

Getting started

In addition to the 19 states with active programs, 15 others commissioned studies or made legislative proposals in 2024. So even if your state isn’t on the list yet, you could soon be making a decision about which retirement plan is right for your business and your employees.

If you live in a state that has enacted or is in the process of enacting its own program, you can visit the Center for Retirement Initiatives’ website at cri.georgtown.edu to review benefits fact sheets and find your program’s official site. You can discuss broader options and opportunities with your financial advisor.

Sources: Center for Retirement Initiatives at Georgetown University, AARP, The Pew Charitable Trusts, Fidelity Investments 2023 Small Business Retirement Index

Raymond James is not affiliated with any organizations mentioned.