By Nich Tremper and Steve Abbott
Policy Background
Only a third of working Americans are covered by an employer sponsored retirement plan, such as a 401(k). As a result, these workers may not have sufficient savings in retirement, forcing them to work longer, rely on family, and need assistance from public welfare programs. To address this coverage gap 17 states have enacted and virtually every other state has considered legislation that would create auto-IRA (Individual Retirement Account) programs that are designed for employees of employers who do not currently offer a private retirement plan.
In general, state auto-IRAs require employers to either offer a defined contribution retirement plan or enroll their employees into the state IRA. However, individual state auto-IRA programs differ in several ways:
- Depending on the state, businesses with as few as 1-25 employees are covered by the requirement
- Default contribution rates vary by state, and not all plans require that plans automatically increase contribution on a regular basis
- Penalties for non-compliance and incentives for compliance are different
This analysis evaluates the different mechanisms that Connecticut and Maryland use to encourage compliance with their respective state IRA programs and the impact that has on participation and retirement savings. In Connecticut, employers with 5 or more EEs are required to comply with the law or could face potential penalties. In Maryland, employers that comply receive a waiver of their annual business registration.
Our evaluation uses a statistical technique that allows us to attribute changes in retirement plan participation in Maryland and Connecticut to implementation of the state’s specific auto-IRA law. Due to the way we’ve structured this analysis we can make inferences about how similar programs would impact workers throughout the county.
Key findings
- Auto enrollment programs increase the likelihood that workers save for retirement. Gusto analysis shows that employees are 20% more likely to contribute to a retirement savings account if they work for a company based in states that have auto enrollment IRA policies.
- Auto enroll IRA programs increase the average retirement contribution by 18% in all retirement savings plans. The average worker making about $60,000 per year can expect an additional $42,000 in lifetime savings.
- Auto enrollment IRA programs increase average savings rates by 55% for earners at or below the median income in all retirement savings plans. The average worker making the median income or less increased their retirement savings rate from 2.2% to 3.4% following implementation of an auto-IRA program. This results in an increase in retirement income of $150 per month.
States with auto enrollment IRA policies increase the number of businesses offering retirement benefits
The chart above shows the share of Maryland and Connecticut small businesses that offer retirement benefits to their employees prior to implementation of the auto-IRA policy. Prior to implementation, the share of businesses offering retirement benefits was trending up in both states. This is likely due to increased demand from employees for retirement benefits, and small business owners recognizing that offering retirement benefits increases employee retention.
However, Connecticut experienced a sharp increase in the share of businesses offering retirement benefits near the implementation date of its auto-enrollment IRA policy. This is compared to no noticeable increase in the share of businesses in Maryland offering retirement benefits from its general upward trend.
Auto enrollment in retirement savings plans ensures that employees maintain a base-line level of savings, with the policy goal of increasing the number of people saving for retirement.
This is in line with other research that shows auto-enrollment programs like Connecticut’s increase the share of workers saving for retirement because they increase the share of businesses that offer the benefit. Programs that incentivize employers to offer benefits did not have any noticeable effect on the share of businesses offering retirement benefits to their employees.
Workers in states with auto enrollment IRA policies are 20% more likely to save for retirement
Programs that incentivize employers to offer retirement benefits, rather than create auto enrollment mechanisms, have no distinguishable difference in the share of employers offering benefits or the share of people saving for retirement. However, auto enrollment programs increase the likelihood that an employee saves for retirement by about 10 percentage points. The chart above shows this. Prior to implementation of an automatic enrollment program, workers in our sample had a 50% chance of participating in a retirement savings account, however, by the first month after the policy was introduced the probability increased to 60% – a 20% increase. The probability of plan participation stayed at this level over the next several months, suggesting that enrollment into a retirement savings plan due to a state’s auto enrollment policies is not temporary and workers will continue to save for retirement after being enrolled. Carried throughout the working age population, this represents a significant increase in the number of people who are saving for retirement.
Just over 52% of U.S. workers have an employee-contribution retirement account like an IRA or 401(k), meaning that a 10 percentage point increase in the share of U.S. workers saving for retirement in an IRA or 401(k) program corresponds to 16.8 million more people participating in these programs. This, in addition to federal programs like Social Security and some pension programs, would increase financial security in retirement.
Average retirement savings increased by 18% following AutoIRA implementation
More people saving for retirement is a good thing, but the amount that they save is as important. Our analysis looked at total monthly contributions for the six months following AutoIRA implementation, and found that, on average, the implementation of an auto-enrollment IRA program increased the average retirement savings rate by about 0.75%.
Importantly, auto enrollment policies are structured so that businesses offer a qualified retirement plan or auto enroll their employees in the state’s IRA program, but they do not mandate that workers maintain their enrollment. Importantly, we see elevated retirement savings rates persist through the first six months of the law’s implementation suggesting long term behavior change.
The table above estimates how the 0.75 percentage point increase in the average savings rate affects the total amount of savings available to somebody when they reach retirement. A worker based in a state with an auto IRA policy making $75,000 could expect to save $53,400 more than someone based in a state with an opt-in program that merely incentivizes employer participation over a thirty year career. Assuming a 4% withdrawal rate in retirement, this corresponds to an additional $180 per month, inflation adjusted. While at face value this may seem modest, this only calculates the additional monthly withdrawal attributed to increased employee contribution and does not take into account increased contribution as wages increase or the worker ages, matched employer contributions, any available pension programs, or other federal programs like Social Security Income.
Auto-enroll IRA policies increase the savings rate of workers at or below the median income by 55%
Policy makers considering auto-IRA likely have the goal of increasing retirement savings in their communities, and rightly so - only 34% of non-retirees believed that they were on track for retirement in 2023. However, there are significant differences in worker’s readiness for retirement based on their income level. Less than a third of workers in the lowest half of the income distribution own a retirement account, compared to well over half of workers in the top half of the income distribution. While auto-IRA laws have long-lasting and broadly beneficial effects across the total income distribution, special attention should be focused on the lowest income earners.
Our analysis of state auto enrollment policies shows a strong effect on low-income earning, with savings rates for median earners and below increasing by more than 55% among the lowest-income earners. For the median income worker, this increase translates to an additional inflation-adjusted $150 per month in retirement. This increase in monthly retirement income represents a nearly 10% increase over the expected full Social Security Benefits for the average person making $40,000, born in 1990, and who retires at age 67.
Conclusion
Personal retirement plans like 401(k) and IRA accounts have the ability to allow individuals to access the benefits of long term market gains through regular deferral of their current contribution. However, criticism of such programs suggests that the gains are focused on high-earning workers and many workers are unable to take advantage of the programs to save. Correctly designed programs, like those that create mechanisms in which employers automatically enroll their employees, increase participation and savings across the income distribution. This not only increases the availability of retirement for workers throughout the income distribution, but increases their financial security as well.
Methodology
Data
Sample 1: Maryland and Pennsylvania
We compare the outcomes of auto IRA legislation in Maryland with Pennsylvania, a comparable state without such legislation, to assess the effectiveness of policies that encourage rather than mandate compliance. The sample consists of small businesses with 5-25 employees from September 2021 to March 2023. Maryland's auto IRA law took effect in September 2022, allowing us to measure retirement savings 12 months prior and six months after implementation. We identified companies as offering retirement benefits if at least one employee had a retirement payroll deduction, regardless of whether it was pre- or post-tax or the type of savings vehicle (e.g., 403(b), 401(k), IRA). For our analysis, we required employees to be with a business offering retirement benefits throughout the entire period, enabling us to isolate the impact of auto IRA legislation on individuals.
Sample 2: Connecticut and Massachusetts
Our second sample examines the outcomes of auto IRA legislation in Connecticut compared to Massachusetts, which lacks such legislation, to evaluate the effectiveness of mandatory compliance policies. The construction of this sample mirrors the first, with the exception of the states and the sample period. Connecticut's law became effective in April 2023, and we include businesses with 5-25 employees from March 2021 to September 2023 to create an 18-month panel.
Statistical Techniques
We evaluated policy effectiveness through increased enrollment and overall savings rates using a difference-in-differences design. This method compares two groups—one experiencing the policy change and one that does not—by measuring outcomes before and after the policy. If the affected group shows greater improvement, we can attribute that difference to the policy.
Likelihood of Offering Retirement Benefits
Our analysis indicates that mandatory IRA policies increase the share of businesses offering retirement benefits by 20% when comparing Connecticut and Massachusetts, controlling for business characteristics and industry. A similar comparison of Maryland and Pennsylvania reveals no significant differences, suggesting that Maryland’s law does not affect retirement savings adoption.
Personal Retirement Contributions
We also found that mandatory IRA policies raise the average contribution limit for workers in states where such programs are implemented. This analysis compares Connecticut and Massachusetts while controlling for individual characteristics and industry, with standard errors clustered across each employer to account for time-dependent autocorrelation within employers. Again, a similar comparison of Maryland and Pennsylvania shows no significant difference, reinforcing the conclusion that Maryland’s law does not affect retirement savings adoption.
1There were 168 million people in the civilian workforce in September 2024.
2We assume an initial contribution of $1,000 in a market-based retirement savings account, 9% market return, and no change in contribution amount over the course of a 30 year career other than inflation adjustments. This is a very conservative estimate because most workers see increases in earnings as they age, which would result in a progressively larger monthly contribution to their retirement account and higher overall savings. These savings would lead to increased monthly withdrawals.
3The 2022 U.S. median income of $40,480 used in this analysis to align with policy implementation.
