Default Contribution Rates and Participation in Automatic IRAs by Uncovered Workers

About half of workers are not covered by a retirement plan at work and these workers are unlikely to save for retirement. For this reason, a number of states have passed legislation that will require employers to automatically enroll their employees into an IRA sponsored by the state (an “auto-IRA”) and administered by a third party. An extensive literature suggests that automatic enrollment will lead to high rates of participation in auto-IRAs. But this literature is based on auto-enrolled 401(k) participants who are likely different from uncovered workers in observable and unobservable ways. This paper instead conducts a national survey of uncovered workers to determine how likely they are to participate in a state-sponsored IRA. The results are encouraging and suggest that uncovered workers are likely to participate at rates similar to those in 401(k) plans at default contribution rates of up to 6 per cent. However, regression analysis suggests that auto-escalation of the default above 6 per cent may result in increased opt-out.