No 401(K)? New retirement plan could help millions save for later years

Around half of Americans working in the private sector do not have access to a retirement plan at work, according to AARP. 

This shocking figure means millions will not have sufficient savings in their later years, a crisis some policy experts see arising in the next few decades.

This gap exists as traditional finally salary pensions have all but disappeared, and not all jobs offer workers a replacement. 

Other employees simply do not qualify for participation in their employer's existing plan. 

However, some states have attempted to plug the gap by launching their own state-sponsored auto IRAs. 

These individual retirement accounts allow employees to automatically enroll if their workplace does not have its own scheme or workplace 401(K) plan in place.

While the first of these schemes only launched in 2017, experts believe they could have already helped millions prepare for retirement. 

Currently ten states, including California and Illinois, have their own IRA schemes and a further seven have committed to starting one. 

Data from eight of these states' programs shows more than 900,000 workers have already amassed savings of over $1.7 billion, according to the Georgetown Center for Retirement Initiatives.  

New reports from Pew Retirement Savings Project and another by Gusto found that there were more knock-on benefits for low-to-middle-income earners - a group which is typically least likely to have a workplace pension. 

Less than one third of workers in this bottom half of income distribution have a retirement account, according to Gusto. 

However, 'workers in states with auto-enrollment IRA policies are 20 percent more likely to save for retirement,' the research found. 

Gusto also found that auto-enrollment IRAs had effectively boosted the savings rate of low-to-middle income earners by 55 percent. 

'The average worker making the median income or less increased their retirement savings rate from 2.2 percent to 3.4 percent following implementation of an auto-IRA program. This results in an increase in retirement income of $150 per month,' Gusto wrote in its report. 

Each state's auto IRA has its own rules, but they typically require employers to make a choice. 

Employers must either offer their workers access to the auto IRA or set up their own employer-sponsored plan, like a 401(K). 

Gusto's initial data also suggests that the introduction of auto IRAs might be leading to more employers offering their own plans.  

If companies choose the state's auto IRA option, employees will automatically be enrolled and employers withhold an amount of workers' pay, usually 5 percent, every month.

Employees in the plan will be given control to change their contribution amount or to opt out of the scheme if they wish.

The structure of an auto IRA is the same as a Roth IRA, so the savings are made after tax has been collected on a paycheck.

But this means the pot is then allowed to grow and be withdrawn in retirement tax-free. 

One downside is that employers can not make matching contributions to auto IRAs as they can with workplace schemes.

However, some participating workers will be able to benefit from the federal saver's tax credit or a new federal savers' match coming into effect in 2027, according to John Scott, director of Pew's Retirement Savings Project.