Some States Try Auto-IRAs to Encourage Savings

Experts have been sounding alarm bells for years about the number of individuals who are not saving enough for retirement.  But many workers continue to put off preparing for the future.  Now some states are taking matters into their own hands.  Several states either have passed legislation or are considering legislation which would create a so-called “auto-IRA.”  States are hoping that these mandatory IRAs will spur savings among employees.

Retirement savings is becoming mandatory in some states.The auto-IRAs are named such because employees are automatically enrolled in the IRA plans.  According to these bills, employees working for small businesses with a certain number of employees (usually 5 or 10) and no retirement plan or 401k will be enrolled by default.  Employees do not have to opt in to this program, though they are allowed to opt out.  Employees are free to request to be removed from the plan at any time.  However, since this requires them to take action, it is anticipated that some enrollees will simply stay in the plan and hence save more for retirement.  At least that is the hope of these states.  (Visit this online article from CBS News for more information.)

Not everyone has been supportive of this legislation.  In states that have passed or are considering these types of bills, some business organizations and insurance associations have been opposed to the legislation.  Some employers have expressed concern about their role as well as their liability.  The bills require employers to deduct the IRA contributions from employees’ paychecks and transfer the deductions to the state.

Will auto-IRAs have an effect on the overall savings of American workers?  Will more workers choose to opt out or will more stay enrolled in the plans?  The answers to these questions are yet to be seen.  As these plans go into effect, we will see how much they affect the behavior of workers.  One thing that seems sure is an increase in administrative time required by small businesses.  Payroll departments will have the added responsibility of deducting and forwarding the deducted money to the state government.

It remains to be seen whether Indiana will follow the pattern of other states by mandating auto-IRAs.  Illinois has. As a small business owner, you’ll want to keep an eye on this issue and how it will affect your payroll operation.  At The Payroll Department, we understand how much you have on your plate.  We work hard for small business owners in the Midwest area by providing reliable oversight of payroll operations.  Call Teresa Ray at (317 )852-2568 to see what we can do for you.

-Jessica of The Payroll Department Blog Team

Posted in: HR Rules, Regulations and Laws, Human Resources, Operating a Small Business, Retirement plans, Rules, Regulations and Laws

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