State IRA programs work toward closing racial retirement savings gap

Tips for structuring your retirement provision

Masks | Masks | Getty Images

Income and wealth disparities between black and white households are wide, but state pension programs are trying to help workers find parity.

According to the US Bureau of Labor Statistics, as of 2020, up to 67% of workers in private industry had access to retirement plans. However, a significant number of employees remain excluded from these programs — and it tends to be people of color who are missing out.

According to AARP, approximately 64% of Hispanic workers, 53% of Black workers, and 45% of Asian American workers do not have access to a company pension plan. Small employers are also less likely to offer pension plans to their employees, as about 78% of those who work for companies with fewer than 10 employees don’t have access to a plan, AARP found.

State-sponsored savings programs for individual retirement accounts have stepped in to try to fill this racist savings gap.

Zoom In IconArrows pointing outwards

Federal Reserve Board, 2019 Survey of Consumer Finances

“It’s preliminary at this point, but the idea was to close the retirement savings gap for people who are being left out, and that tends to be low-income workers, workers of color,” said Illinois State Treasurer Michael Frerichs.

According to Georgetown University’s Center for Retirement Initiatives, 16 states have enacted new initiatives to help private sector workers save, and 11 of them have auto-IRA programs. At the end of January, there were more than $735 million in assets in these state-sponsored retirement plans, the center found.

“An important part of the purpose of the nationwide movement to get states to play a supportive role in the private pension system was to reduce the disparities between race and sex and between white-collar workers and blue-collar workers,” said J. Mark Iwry , Nonresident Senior Fellow at the Brookings Institution.

He co-authored former President Barack Obama’s “Auto-IRA” bill, a push to expand access to retirement savings through automatic enrollment with IRAs, and pioneered the nationwide government-sponsored retirement savings movement that began more than 20 years ago.

How it works

Rather than compete with large corporate pension plans, government-sponsored retirement plans focus on an underserved corner of the market: small businesses.

Most of these state programs require companies to either offer a company pension plan or automatically enroll their employees in the state program.

Typically, the savings program is a Roth IRA — which means employees save money after tax — and they can save 4% to 6% on their compensation through an automatic payroll deduction, according to Craig Copeland, director of wealth, according to employee benefits research at the Employee Benefit Research Institute. Employers themselves do not pay for the schemes, and an investment firm manages savers’ accounts.

Saving with a Roth IRA means that the money grows tax-free and, under certain conditions, can be withdrawn tax-free in retirement. If participants need to withdraw money in an emergency, they can take their own contributions – but not the earnings – tax-free.

Frerichs said about half of the participants in Illinois’ Secure Choice program are black or Hispanic. The program has been running since 2018 and recently expanded access to companies with as few as five employees.

“We get the people who fell through the cracks and don’t have a safety net,” he said, noting that this includes workers in bars, restaurants and grocery stores.

Perhaps the strongest feature of auto IRA plans is automatic payroll deduction. “It’s the ‘set and forget’ mentality,” said California State Treasurer Fiona Ma. It’s easy for employees to spend the money that ends up in their checking accounts, and when some of that goes straight to retirement, their funds can grow.

Workers who join CalSavers start with a standard contribution of 5% of their salary and are subject to an annual automatic escalation of 1 percentage point until they save 8% of their salary, according to Katie Selenski, the program’s executive director.

“Being able to save and accumulate it was a game changer in trying to narrow the wealth gap,” Ma added. She found that two out of every three workers eligible for the California program are black.

On January 1, the state expanded its CalSavers program to include companies with one to four employees. If they don’t already offer workers a 401(k) plan, those employers must have a payroll savings agreement in place that would allow workers to participate in CalSavers through the end of 2025.

strengthen savings

The wealth disparity between black and white households is the result of generations of discrimination, including practices such as redlining — that is, denying loans to prospective homebuyers in minority neighborhoods. That means these government IRA programs are a step in closing the gap.

Legislators have pushed for further progress in the form of a measure in the Secure Act 2.0. A provision in the proposal would establish a federal equalization contribution for low-income workers who save into a qualifying retirement account beginning in 2027. This offset would be a maximum of 50% of up to $2,000 in contributions – a maximum of $1,000 per person.

“If low-income workers set aside $2,000 and get 50 cents for every dollar, that’s a significant boost,” said Monique Morrissey, an economist at the Economic Policy Institute. “That will help, but it’s a few years in the future. So for now we see that these [auto-IRA] Plans help in terms of comfort.”