State 401(k) Mandates May Cause ‘Crowd-In’ Effect, Boosting Private Plans

State retirement plan mandates that offer state-facilitated auto-IRAs may be creating a “crowd-in” effect causing more small employers to offer private market 401(k) plans to their employees, according to a recent paper released by the National Bureau of Economic Research.

By analyzing tax information from employers in four states with mandated retirement plans via automatic individual retirement account programs, a team of four NBER researchers came to the conclusion that at least 30,000 companies with fewer than 100 employees were “induced” to offer a private market employer-sponsored retirement plan due to the state mandates. The sample set is from 2017 through 2022, when the four state programs—Oregon, Illinois, California and Connecticut—were going through various stages of rollout.

“We find clear and substantial increases in the share of affected firms establishing an ESRP [employee sponsored retirement plan] immediately upon implementation [of state-mandated programs],” the researchers wrote in their findings. “We refer to this induced increase in ESRP offerings as the ‘crowd-in’ effect of the policy. We do not find evidence of any offsetting ‘crowd-out’ (firms terminating existing ESRPs in favor of utilizing the state auto-IRA program).”

For a sense of scale, the researchers estimated that the 30,000 firms represent about one-sixth of all private companies with fewer than 100 employees that fell under the mandate. The number is also “substantially relative” to the number of firms participating in auto-IRA programs directly, according to the researchers, with the ESRP “crowd-in” companies accounting for between 27% and 45% of the total increase in employer coverage.

The research adds to an ongoing dialogue about what state auto-IRA programs—largely cheaper than privately provided 401(k) plans—will do to sales in the sector.

As of June 30, 17 states have auto-IRA programs, according to Georgetown University’s Center for Retirement Initiatives. So far, all state-facilitated programs have amassed more than $1.64 billion in assets, according to the Center’s ongoing tracking.

Rising Tide

The NBER research, though a relatively small sample compared to the nation, points to what many small plan providers have argued: When it comes to retirement plan mandates, a rising tide lifts all boats.

Aaron Schumm, CEO of holistic savings platform Vestwell, says rather than reducing private plan coverage, state auto-IRA programs are doing the opposite.

“They have been an incredible driving force behind the adoption of new workplace savings programs—both through the state and in the private plan market,” he said in an interview not directly related to the NBER report. “Along with tailwinds from SECURE 2.0, we’ve seen unprecedented demand from businesses looking to implement a savings program for their employees.”

Schumm’s Vestwell has been one of the most prominent private players in helping states to set up their programs. The company is currently working with 30 state-sponsored savings program, nine of which are state auto-IRA programs, he says. Most recently, the firm helped launch the Delaware EARNS program and New Jersey’s RetireReady NJ, having already established partnerships with Coloroado SecureSavings, Connecticut’s MyCTSavings and OregonSaves, among others.

“It’s no secret that there’s a savings crisis in the United States, especially a retirement savings crisis,” says Vestwell’s Schumm. “A key way to address this crisis is through awareness and broadening access.Sstate savings programs are doing just that.”

Ascensus has been another plan provider actively working with states, including a prominent state-mandated plan, California’s CalSavers.

Vestwell’s Schumm notes that, when penalties are given to employers for not offering a retirement plan, pickup for startup 401(k)s is even higher. As other states see this, they are “now looking to incorporate legislation that would also penalize employers, in an effort to increase adoption of saving plans,” according to Schumm.

All four states the NBER team reviewed issue a fine if an employer fails to offer a private or state-facilitated option to employees.

Crowd-In

By considering the state programs as “experiments,” the researchers looked to determine, via U.S. tax data, how many firms with fewer than 100 employees were prompted to add their own employer-sponsored plans. NBER analysts homed in on firms adding a 401(k) as prompted by the mandate, which yielded the 30,000 number.

“This effect is large considering that, for employers, establishing and maintaining an ESRP is more costly than utilizing the state-facilitated IRAs,” the researchers wrote.

They then attributed this “somewhat counterintuitive observation” to several factors.

“First, owners or employees may value ESRPs to a much higher extent than auto-IRAs—perhaps because of binding contribution limits in IRAs, because of pre-existing IRA participation, or because ESRPs do not require automatic enrollment,” they wrote.

Second, according to the paper, employers may perceive that participating in the auto-IRA program has a high administrative cost relative to the cost of running and controlling their own employee-sponsored plan.

“Although auto-IRAs are advertised as ‘free’ to employers, we expect that an auto-IRA program has a positive, though likely small, cost to the firm—the employer faces the administrative burden of registering for the program initially, automatically enrolling new employees, and facilitating the payroll deductions,” the researchers wrote.

Meanwhile, certain “behavioral factors” may also play a role, ranging from how business owners view the state programs to being persuaded by marketing from small plan providers.

“Third party ESRP administrators have responded to these state policies through targeted marketing, designed to convince small business owners to comply with the mandate by offering an ESRP rather than participating in the auto-IRA,” the team wrote. “It is possible that this marketing was particularly successful and effectively altered decision-makers’ perceptions of the costs and benefits of both ESRPs and auto-IRAs.”

Future Possibilities

According to the Georgetown retirement center, numerous other states are either getting ready to implement or are considering state-facilitated retirement programs. Meanwhile, a federal retirement mandate has been floated that could get a hearing again in 2025 depending on the result of fall U.S. elections. Representative Richard Neal, D-Massachusetts, the ranking member of the U.S. House Committee on Ways and Means, proposed earlier this year the Automatic IRA Act of 2024, which was followed quickly by retirement industry support.

Vestwell’s Schumm supports that bill and any legislation that would expand “individuals’ access to savings across the country,” and he does not anticipate the Automatic IRA Act would have a negative effect on the state programs.

“The bill, in its current form, does not affect workers currently enrolled in a state-facilitated plan,” he says. “Ultimately, the more awareness brought to the savings crisis, the closer we will realize our mission of closing the savings gap.” 

NBER’s paper, “Why Do Employers Establish Retirement Savings Plans? Evidence from State ‘Auto-IRA’ Policies,” was written by researchers Adam Bloomfield of the Georgetown University Center for Retirement Initiatives; Lucas Goodman who was with the Office of Tax Analysis, at the U.S. Department of Treasury when the research was done; Mania Rao of the AARP Public Policy Institute and the Georgetown Center; and Sita Slavov of George Mason University and National Bureau of Economic Research.