Workers at private companies have amassed more than $400 million in state-run retirement programs

By the looks of it, state-run retirement programs for private-sector employees are generally working as intended.

Those with no access to a 401(k) plan or similar workplace option have collectively saved more than $400 million in individual retirement accounts through such programs. To date, there are three states that have them up and running, although others are on deck.

“Making these available to more private-sector workers so they can save for retirement is absolutely critical,” said Angela Antonelli, executive director of Georgetown University’s Center for Retirement Initiatives.

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The rise of these state-run programs is part of a broader effort to increase the ranks of retirement savers. An estimated 57 million workers lack access to a plan at their job, Antonelli said.

Workers appear to need all the help they can get. For instance, the median account balance for individuals nearing retirement — those ages 55 to 64 — is $84,714, according to Vanguard’s latest How America Saves report. Generally, it’s recommended that you have 10 times your annual salary saved if you want to retire at age 67, according to Fidelity Investments.

Through state-run programs in California, Illinois and Oregon, nearly 430,000 accounts have been funded since the first (OregonSaves) began in 2017.

This year, Maryland and Colorado are expected to roll out their own versions, while Connecticut will shift to a full launch from its pilot phase. A handful of other states — including Massachusetts, Vermont and Washington — have programs that operate differently, with participation voluntary.

(The California program remains involved in a lawsuit challenging its legality. Most recently, the plaintiff has petitioned the Supreme Court to consider the case. It’s uncertain whether the high court will accept or decline it.)

Other states, including Maine, New Mexico and Virginia, are in the early planning stages of starting their programs. Altogether, 46 states have either implemented or considered legislation since 2012 to create retirement savings initiatives to reach workers without a plan at work.

Although it’s possible to set up a retirement account outside of employment, individuals are 15 times more likely to save if they can do so through a workplace plan, according to AARP, the advocacy group for older Americans.

Add in automatic signup, and the outcome is better: The total average savings rate is 56% higher (including employer contributions) among 401(k) plans with auto enrollment, Vanguard research shows.

While large employers are more likely to offer a retirement option, cost and administrative burdens can stand in the way of small business owners’ pursuit of setting one up. Thus, these state-run programs can increase access to a workplace plan for those workers.

Although there are some minor differences among the state-run programs, the general idea is that employees are automatically enrolled in a Roth IRA through a payroll deduction (starting around 3% or 5%) unless they opt out. There is no cost to employers, and the accounts are managed by an investment company. 

OregonSaves, which launched in 2017, has an opt-out rate of about 32%, according to the program’s most recently available data. The average account balance is $1,331.

For workers who may end up enrolled in these programs, it’s worth knowing that contributions to Roth accounts are not tax-deductible as they are with 401(k) plans. (Traditional IRAs, whose contributions may be tax-deductible, may be available as an alternative option, depending on the specifics of the state’s program).

However, Roth IRAs — unlike, in general, 401(k) plans — also come with no penalty if you withdraw your contributions before age 59½.

This means that if you take back any contributions to a Roth before retirement, there is no penalty because you already paid taxes on them. (For earnings, however, there could be a tax and/or penalty.) 

Additionally, these Roth accounts generally won’t have an employer match on work contributions, as 401(k) plans often do.

Yearly Roth IRA contribution limits also are lower. You can contribute $6,000 in 2022, although higher earners are limited in what they can contribute, if at all. Also, anyone age 50 or older is allowed an additional $1,000 “catch-up” contribution.

For 401(k) plans, the contribution limit is $20,500 in 2022, with the 50-and-over crowd allowed an extra $6,500.