This 401(k) alternative has saved American workers more than $1.7 billion so far.

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By some estimates, nearly half of America's private sector workers, or nearly 57 million people, according to AARP, do not have access to a workplace retirement plan. This is either because their company doesn't offer one or because they aren't eligible to participate in an employer's existing plan.

That's just one reason why policy experts see a looming retirement savings crisis for so many Americans over the coming decades.

But the advent of state-sponsored auto IRA individual retirement account programs, which workers can be automatically enrolled in if their company does not have their own workplace plan in place, is helping to reduce this coverage gap.

Automatic IRAs are relatively new. The first began in 2017, and now a total of 17 states have adopted theirs, although only 10 are currently in effect, with a few more expected to come online next year, according to AARP.

But, based on program data from eight states alone, more than 900,000 workers have already accumulated more than $1.7 billion in savings as of October, according to the Georgetown Center for Retirement Initiatives.

And two new auto IRA analyzes released this week by the Pew Retirement Savings Project and by Gusto, a provider of payroll and human resources software for small and medium-sized businesses, found broad benefits, particularly for salaried employees. low- and middle-income earners, who are generally the least likely to have access to employment plans.

The 17 states that have adopted automatic IRAs to date are California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Minnesota, Nevada, New Jersey, New York, Oregon, Rhode Island, Vermont, Virginia and Washington.

Although they each have their own rules, they generally force employers to make a choice: either offer their employees access to the automatic IRA or create their own employer-sponsored plan, such as a 401(k). ).

Employers who choose to use the state's automatic IRA automatically enroll employees and withhold a preset savings rate, typically 5% workers pay each pay period, according to John Scott, director of the Pews Retirement Savings Project . Workers have the option to change the amount of employee contributions or withdraw from the plan completely.

Auto IRAs are structured like Roth IRAs, according to the Georgetown CRI, so savings contributions are made with after-tax dollars and savings can grow and be withdrawn in retirement tax-free.

Employers are not allowed to make matching contributions to auto IRAs, but some worker participants may benefit from the federal savers tax credit or a new federal savers matching taking effect in 2027, Scott noted .

Noting that less than a third of workers in the bottom half of the income distribution own a retirement account, Gusto found that workers in states with automatic IRA enrollment policies are 20% more likely to save for their retirement.

It also found that auto-enrollment IRAs actually increased the savings rate of low- and middle-income earners by 55%.

The average worker earning the median income or less increased their retirement savings rate from 2.2% to 3.4% following the implementation of an auto-IRA program. This translates to an increase in retirement income of $150 per month, the Gustos researchers wrote.

Initial data also suggests that the introduction of automatic IRAs may be correlated with more employers offering their own plans.

Pew found that in some states with automatic IRAs, more private sector plans were introduced. There is typically an increase in the formation of new plans when state programs start or at major implementation deadlines, as was the case in California in 2022, the researchers wrote.

It's not entirely clear why, since small businesses often cite costs and administrative burden as reasons why they don't sponsor a retirement plan.

But, Pew noted in its report, post-pandemic improvement in the economy could help, along with new incentives for employers following the 2019 passage of SECURE 1.0 legislation, which made it easier and Less expensive starting a small business for small business owners. retirement plans for their employees.

It's possible that when their state pressed them to offer the automatic IRA or develop their own plan, some companies were spurred into action if they had already thought about offering a 401(k) or other sponsored option by the employer, Scott suggested. .

And it’s good for both the employer and the employees. A solid workplace savings plan can help attract and retain workers. And employer plans offer workers tax breaks and direct matching contributions, which can help them grow their nest egg faster than they otherwise would.

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