Auto IRAs and Employers: What’s the Skinny?

Alison Shelton has researched and spoken about retirement security for two decades.

Ms. Shelton previously worked at AARP’s Public Policy Institute, at the Congressional Research Service, and in the domestic and international divisions of the U.S. Treasury Department. Whew!

She is a graduate of Smith College and the Wharton School of the University of Pennsylvania.

Alison Shelton, we are so pleased to have you with us today. You're a Senior Research Officer with Pew’s Retirement Savings team. Tell us about your work.

I'm glad to be here! This team started up in 2014. And I've been here for the most recent four years of our activity.

We have two main areas of interest. The first is access to workplace retirement plans. We’re working to understand who has access, who doesn't, and how the US can help an expanded group of Americans to get access. As part of this work Pew provides technical assistance to state Treasurers, legislatures and others who are pursuing retirement security solutions.

Related to that access work, we also have a project on self-employed workers, the freelancers and independent contractors that are unlikely to have their own workplace retirement plans, and we will be issuing results from our survey of contingent workers in the next few months.

The second major area of interest is preserving assets in retirement. Specifically in that space we're looking at fees that people pay on their assets and how they can avoid asset erosion.

We know your latest research on the state Auto IRA programs is focused on employers. Tell us what you’re learning.

You bet. We’ve got some history here. In fact, we started looking at employer and employee interest in these programs even before states began implementing them. Now that seven states have programs and are rolling them out, we're starting to look at employer and worker experiences.

So interesting – now you can look at live info.

Yes. We are conducting surveys in multiple states. Some of these state programs are really brand new and we are in beginning stages of those surveys. Oregon’s got a slightly longer history. We were able to survey more than 2,500 private sector businesses in Oregon over 2019 and 2020. What we're talking about today is this first survey work based on the OregonSaves program and employers’ experiences with it.

Key findings

• Four-fifths of employers (79.8%) reported that their employees had few or no questions about the program. Approximately 4% of employers reported that their workers had a lot, or a great deal, of questions about the program.

• Large firms fielded more questions from their workers than small firms, an unsurprising result given that a higher number of employees could generate a higher number of questions.

• Workers in the following industries had more questions than workers in other industries: leisure and hospitality (24.3%); trade, transportation, and utilities (21.9%); and administrative and support services (20.2%). By contrast, only 14.5% of employers in the manufacturing industry reported receiving questions from their employees. Industries with a greater number of part-time and contingent workers (such as on-call, temporary help agency, freelance, and independent contractors) may see more questions about whether employees qualify for the program.

• Firms that already had a pension plan for some part of their workforce were more, not less, likely to field questions about OregonSaves from their workers. Although the reasons are not clear, this finding could indicate that new participants in OregonSaves had questions because they were comparing the auto-IRA program with the retirement savings plans used by other employees at their firm.

• Higher employer satisfaction with OregonSaves is strongly linked to low levels of workers’ questions about the program. Satisfaction may reflect, in part, that OregonSaves’ customer service channels were successful in resolving questions and issues, resulting in fewer questions directed to employers.

Your most recent work focuses on whether employers are getting a lot of questions from employees who've been automatically enrolled. What are your top discoveries?

We found some interesting results! Four-fifths of Oregon employers, about 80%, reported that their employees had few or no questions about the program.

On the opposite end, about 4% of employers reported that their workers had a lot or a great deal of questions about the program. And who was getting the questions? It turns out that large firms fielded more questions from their workers than small firms. That's not really a surprising result, given that if you have more employees, you're going to generate a larger number of questions. We also saw that certain industries with higher levels or seasonal or part-time workers, like leisure and hospitality, tended to get more questions.

As you know, state policy makers like those in Oregon are working to set up ongoing operations that minimize burdens on participating employers.

One of the things they're doing is to set up customer service channels to help respond to questions and resolve any issues. Employers are encouraged to direct their workers to these channels.

And it's useful to note that employers who received fewer questions were more satisfied with the program. That satisfaction probably reflects the success of customer service channels in resolving these questions and issues, resulting in fewer questions directed to employers.

That makes sense. Switching gears, what are some of the other interesting tidbits that you've seen in the last few years?

One of the things I have really been interested to see is that even a small Auto IRA balance can make a really big difference in retirement.

It's the case that many people will not have large Auto IRA balances when they hit retirement age. There are caps on how much you can save annually. In addition, people will be going in and out of the system as they change employers.

So, people in the second half of their working lives may not necessarily accumulate a whole lot in their Auto IRA accounts, but if they use this savings in certain ways they can really increase their financial well-being. For some this might be as simple as having available a balance for the first time that they can use for emergency savings or in the event of a health crisis.

For many, these balances can drive meaningful Social Security benefits increases. We did a study on this, illustrating how you could take your Auto IRA balance and use it to defer claiming Social Security. We’ve shown that over half of participants could defer for a year or more, increasing their retirement income through Social Security by a considerable amount.

As you might know, for every year you defer after age 62, your Social Security benefit goes up by about 8%. This is a permanent increase and it's actually a pretty decent return.

We have a feeling that's a bigger raise per year than most people get even at work. Present company included.

Yes! Those kinds of raises are rare these days.

Alison, you’ve seen so much. If you could wave a magic wand and change one thing in the retirement savings space, what would it be?

In the retirement field what we've really learned over the past decade is that people save best through a workplace plan. And the most effective plan is one where things are automated. You get defaulted into the system at a starting savings rate that escalates. You can opt out, but people generally don't.

If I could wave a magic wand I'd like to spread these sort of automated savings systems around to the many people who don't have their own workplace plans. So programs like Auto IRAs, which provide an automatic work-based savings mechanism, are actually part of the solution.

It would be nice to help people to save more, and to have coverage be more wide-spread. It does seem like we’re headed in the right direction.

We love it. It’s been a tough time for most people – what are your bright spots?

Well, gosh. I think it's been a struggle for all of us. My son and daughter – they’re 25 and 22 -- moved back in and they're teleworking with me. So we've got three teleworking areas set up here – it’s been nice to have them. We all just got our shots, making a two-hour drive to use some extra inventory on the edges of Maryland. So maybe as a nation we're pulling out of this. We can only hope it happens sooner rather than later!

That’s awesome. Well done you! We’re still waiting for someone to jab us in the arm here on the West Coast. The day ☀ is coming.

Thank you so much for your fresh insights Alison Shelton! Want to connect directly with Alison to ask her some of the questions we didn’t? You can, right here. Connect with Alison on Twitter: @AlisonShelton18, and LinkedIn. And you can follow the work of Alison and her peers at Pew’s Retirement Savings Project here and on Twitter: @pewtrusts.

This piece was featured in April 8, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here