State-run retirement savings programs are complementing — and not competing with — the private retirement plan market, according to separate studies by The Pew Charitable Trusts and payroll and benefits provider Gusto released Nov. 14.
Businesses in California, Illinois and Oregon — the first three states to launch auto-IRA programs to help private-sector workers without workplace plans save for retirement — continued to launch new plans in 2022 and shed existing plans at rates slower than or largely comparable to the national average, Pew found in its study.
The study, which updates an analysis Pew conducted last year, also found similar results for Connecticut. Since Connecticut’s state-run program began rolling out in 2022, there was an increase in the creation of new plans without an uptick in termination of existing plans, Pew said.
The study stemmed from concerns that state-run programs might “crowd out” the private market by prompting businesses to forgo adopting their 401(k) plans or even terminate existing plans in favor of the state plans.
The data allayed the worries, said John Scott, director of Pew’s retirement savings project, during a media briefing in which he presented the study’s key findings.
In each of the four auto-IRA states studied, the creation of new plans increased. In California, the surge in new plan formation was especially strong as employers with five or more employees approached the June 30, 2022, deadline to enroll their workers in the state plan. At the end of 2022, the introduction of new retirement plans, as a share of existing plans, rose to an average of 17.2%, up from 8.8% in 2019 when the program went live.
“You see this huge increase in the number of employers that have adopted a plan in the state of California,” Scott said, referring to the spike in 2022.
Scott also noted that the state-run programs did not lead employers to drop their own 401(k) plans.
“We’re not seeing employers dumping their plans or terminating their plans and sending workers to the state programs,” he said.
Gusto also shared research showing that Connecticut’s auto-IRA program led to an increase in the number of employers offering workplace retirement saving plans.
“Connecticut experienced a large increase in businesses offering plans,” said Nich Tremper, senior economist at Gusto.
In Maryland, however, where the auto-IRA program is not mandated, the impact on new plan formation was more subdued.
“Our analysis showed that Maryland’s implementation did not have any change from the trend that it was already on,” Tremper said.
Gusto’s study of Connecticut and Maryland also found that the programs increased worker’s average retirement savings rate by 18% when compared with states that did not offer such programs.
“The average worker making about $60,000 per year can expect an additional $42,000 in lifetimes savings due to auto-IRA programs,” Tremper said.
Pew’s study is based on data from Form 5500s and Form 5500-SFs, or short forms — typically for plans with fewer than 100 participants — from 2013 to 2022. Gusto’s analysis is based on a sample of small businesses in Connecticut, Maryland, Massachusetts and Pennsylvania with five to 25 employees from March 2021 to September 2023. Two of the four states — Massachusetts and Pennsylvania — do not offer state auto-IRA programs. Gusto said it used a statistical technique that allowed it to attribute changes in retirement plan participation in Maryland and Connecticut to implementation of the state’s specific auto-IRA law.