What Is a State-Sponsored Retirement Plan and How Does It Work?

What Are State-Sponsored Retirement Plans?

State-sponsored retirement plans offer an alternative for self-employed individuals and employees whose jobs don't provide retirement plans. State retirement boards direct the plans and contract with IRA administrators to manage them. Most state-administered plans are Roth individual retirement accounts (Roth IRAs); however, some allow you to choose a traditional IRA.

Some states require employers to participate if they don't offer their own retirement plans. Employers who choose to participate simply enroll employees and manage the payroll contributions.

Because enrollment is automatic, the plans are sometimes called auto-IRAs. If your employer participates in a state-administered retirement plan, you'll be enrolled automatically (although you can opt out). The plans are portable: If you leave your job or move to a different state, you can keep the IRA or roll over the funds to a new IRA .

Auto-IRAs are gaining traction as a way to help low- and middle-income households prepare for retirement. Only 1 in 10 low-income households with members ages 51 to 64 had a retirement account balance in 2019, compared with 9 in 10 high-income households, the Government Accountability Office reports. The cost, time and effort of offering retirement plans can be prohibitive for smaller employers. By encouraging retirement savings, state-run plans can help ease the burdens an aging workforce will place on Social Security in the coming years.

Where Are State-Sponsored Plans Available?

State auto-IRA plans have been enacted in 15 states:

• California
• Colorado
• Connecticut
• Delaware
• Hawaii
• Illinois
• Maine
• Maryland
• Minnesota
• Nevada
• New Jersey
• New York
• Oregon
• Vermont
• Virginia

Not all the enacted plans are active yet, however. States typically roll out implementation in stages, starting with larger employers and moving to smaller ones. As of September 2023:

• California, Colorado, Connecticut, Illinois, Maryland, Oregon and Virginia have active auto-IRA plans.
• Maine is scheduled to pilot its program in October 2023.
• Delaware is scheduled to pilot its program in January 2024.
• Hawaii, Minnesota, Nevada, New Jersey, New York and Vermont are still developing implementation timelines.

The city of Seattle enacted a plan in 2017, but it has been delayed by legal issues and is not expected to be implemented. New York City also enacted a plan, but it is expected to merge with the New York state program.

How to Enroll in a State-Sponsored Retirement Plan

Specifics may vary, but in general, here's how enrollment works.

If your employer participates, you'll be notified that you will be automatically enrolled. Once enrolled, you generally have three options:

1. Do nothing and contributions will be made automatically. The default contribution is generally 3% to 5% of your wages, but you can adjust these amounts anytime. For 2023, IRA contributions are capped at $6,500; those ages 50 and older can contribute an additional $1,000. Employers cannot contribute to the plan for employees.
2. Opt out of the plan by phone or by completing an online form.
3. Customize your account. You can choose from savings and investment options, adjust your contribution, select a beneficiary or make a withdrawal.

If you're self-employed or your employer doesn't participate in a plan, you can sign yourself up at your state's plan website. Enrollees generally need to provide a Social Security or taxpayer identification number, birthdate, contact information and bank information.

For more information, visit your state's plan website:

• California: CalSavers
• Colorado: Colorado SecureSavings
• Connecticut: MySavings
• Illinois: Illinois Secure Choice
• Maryland: Maryland Saves
• Oregon: Oregon Saves
• Virginia: RetirePath

Georgetown University's Center for Retirement Initiatives (CRI) maintains an updated map of state-administered retirement plans, including states whose plans aren't active yet, where you can get information and updates.

Benefits of State-Sponsored Retirement Plans

State-administered retirement plans have several advantages.

• Easy: Sure, you can open an IRA on your own at a bank, credit union or brokerage firm, but doing so requires research and decision-making you may not have time for. If your employer participates in a state-administered plan, you're automatically enrolled—with no action on your part. Even enrolling yourself is simple.
• Options: Just as you would with your own IRA, you have lots of options. You can choose from different investments and change your contribution at any time.
• Portable: You can keep your IRA when you leave your job.

Alternatives to State-Sponsored Retirement Plans

If a state-sponsored retirement plan isn't available or you don't want to participate, consider these options.

Traditional or Roth IRA

You can open IRAs at banks, credit unions, mutual fund firms or brokerages. Contributions to traditional IRAs are made pretax; you'll pay taxes when you withdraw the money in retirement. Roth IRA contributions are made after taxes, and withdrawals are tax-free.

Health Savings Account (HSA)

Employers may offer health savings accounts; you can also open one yourself with an HSA provider. HSAs let you save pretax money for qualified medical expenses. Some HSAs also let you invest those savings. After age 65, you can use HSA funds for anything, not just medical expenses. You need a high-deductible health plan (HDHP) to open an HSA. For 2023, contribution limits are $3,850 for self-only health plans and $7,750 for family plans.

Solo 401(k)

Self-employed people can set up one-participant 401(k) plans, make pretax contributions and pay taxes when they withdraw funds as early as age 59½. You can contribute significantly more to a one-person 401(k) than to an IRA—plus, you can contribute twice. As an employee of your business, you can contribute up to $22,500 for 2023; you can add catch-up contributions up to $7,500 if you're 50 or older. As an employer, you can make a second contribution of up to 25% of your compensation, for a combined maximum contribution of $66,000 (not counting catch-up contributions).

Simplified Employee Pension (SEP)-IRA

Designed for self-employed individuals, SEP-IRAs let you contribute more than traditional or Roth IRAs or 401(k)s. For 2023, you can contribute as much as 25% of your total compensation, up to $66,000. (There are no catch-up contributions.) If you have employees, they can participate too.

Investing

If you're fully funding a retirement account, have an emergency fund and minimal credit card debt, consider investing in stocks and bonds. Individuals can open online accounts with brokerage firms such as E-Trade, Fidelity Investments or Charles Schwab to buy and sell investments. You can also use robo-advisors—automated advisors that use artificial intelligence to make choices based on your timeline, risk tolerance and financial goals.

Retirement Savings Made Easier

If you don't have a workplace retirement plan, a state-run retirement plan is an easy way to start saving. Making a habit of contributing regularly—no matter how little—can make a big difference at retirement.

Paying bills on time and minimizing debt are other habits that can help you save more for retirement and improve your credit. Sign up for free credit monitoring from Experian to keep an eye on your credit no matter how busy life gets.