It is estimated that almost a third of working Americans are not covered by an employer sponsored retirement plan, such as a 401(k), and there is a concern that these workers will not have sufficient savings in retirement, forcing them to work longer, rely on family, and/or need assistance from public welfare programs. To address this “coverage gap” several states have launched or are considering starting auto-IRA (Individual Retirement Account) programs that are designed for employees (EEs) of employers (ERs) who do not currently offer a private retirement plan.
A typical state auto-IRA mandates ERs of a certain size (i.e. five or more employees) either have to offer a defined contribution retirement plan or enroll their EEs into the state IRA. The state IRAs offered thus far are based on the Roth structure (post-tax earnings, tax-free withdrawals in retirement), however IRAs, compared to 401(k) plans, are subject to lower contribution amounts and do not allow for ER contributions. This distinction may play a role in an ERs decision process of which plan to choose.
The savings data from California, Oregon, and Illinois clearly demonstrate that auto-IRAs have had the intended effect of expanding retirement plan coverage and increasing savings among workers. As more states consider creating their own programs, there are still open questions about what impact the state plans would have on private plan formation. Many in the financial services industry have expressed concern that the state plans would effectively compete with the private market, driving out competition and reducing private plan adoption by employers.
In California, the compliance deadline for employers with five or more employees went into effect on June 30th, which impacted thousands of Gusto’s customers. This presented an opportunity for our product team to assess the impact of the impending deadline, and what effect it would have on adoption rates of private 401(k) plans. Starting in January our team started informing the impacted employers through the platform that they had to take action to stay compliant by either signing up for a 401(k) or enrolling in CalSavers.
In order to determine the best way to communicate the CalSavers compliance deadline, our product team selected a subset of the impacted employers to receive additional notifications starting on May15th. Gusto saw an increase of 35% in 401(k) adoption from our typical rate through the observed period between May 15th and June 30th, and this higher adoption rate has continued to date. The CalSavers compliance deadline clearly had an impact on an employers’ decision to offer a 401(k) to their employees through a private plan, and allowed Gusto to determine the best way to communicate this to our impacted customers.
Below are a few more key data points about the population of Gusto customers who were impacted by the deadline and opted for a 401(k):
- Employee salary and wages are ~36% higher than average
- Companies have 27% more employees
- There is a relatively even distribution across industry groups (Personal Services, Professional Services, Community Services, Goods Producing/Logistics)
The data indicates that average employee income and company size are perhaps more significant indicators of an ERs decision to adopt a private 401(k) than a specific industry group.
The major caveat of these findings is that we have only one observation specific to California based companies that have between 5–49 employees without an employer-sponsored defined contribution plan. Regardless, there is seemingly strong evidence that state auto-IRA compliance deadlines are a nudge to get a significant number of ERs to adopt a private retirement plan. This is inline with recently published research from the Pew Charitable Trusts that shows an increase in plan formation for states with operating auto-IRAs.
As more state programs come online, we will continue to engage with our customers and monitor what impact they have on affected companies on Gusto’s platform. If we continue to see similar increases in adoption rates of retirement plans, these state auto-IRA compliance deadlines may create a significant opportunity for private plan providers to increase their market share.