Colorado and New Mexico have joined forces in a historic partnership to help more workers save for a secure retirement as they move between jobs and across state lines.
In 2020, each state independently enacted legislation to establish its own auto-enrollment IRA program for private sector employees. Officials in both states anticipate the new partnership will create efficiencies, generate economies of scale, lower fees and enhance accessibility and flexibility.
"This retirement savings partnership between Colorado and New Mexico exemplifies the best in forward thinking and collaboration." —Colorado State Treasurer Dave Young
Announced in November 2021, the memorandum of cooperation between the Colorado Secure Savings Program and the New Mexico Work and Save program is the first of its kind. Several states have adopted similar standalone programs to promote retirement stability for workers who lack access to on-the-job savings (often nontraditional workers, lower-paid workers, small-business employees and people of color).
Historically, the principal sources of retirement income for private sector workers have included Social Security, employer-provided pensions and individual savings. However, fewer employers are offering traditional defined benefit pensions, putting pressure on workers to save independently throughout their careers. Another issue is changing demographics: People are simply living longer and need to save more money as a result. Finally, if policymakers take no further action, Social Security’s combined Old-Age and Survivors Insurance and Disability Insurance trust fund reserves may be depleted as early as 2034.
In response, state legislators have introduced and adopted a wide range of state-facilitated retirement savings programs, some of which feature IRAs that receive automatic deposits from workers’ paychecks. These programs generally require employers of a certain size to offer their employees a way to save for their future. Businesses may sponsor their own 401(k) or similar savings vehicle, or their employees may participate in the state-facilitated alternative.
In the latter type of arrangement, employee funds are pooled and professionally managed by financial services providers. Nine other states—California, Connecticut, Illinois, Maine, Maryland, New Jersey, New York, Oregon and Virginia—have adopted similar auto-IRA programs in recent years. Implementation is already well underway in several states, including California, Illinois and Oregon, whose combined saver assets now top $407 million. The state-facilitated plans achieved a major legal victory in February when the U.S. Supreme Court declined to review a lower court ruling that upheld California’s program in the face of a federal preemption challenge.
However, the multistate collaboration between Colorado and New Mexico stands apart, with the potential to increase access to portable benefits for workers, ease burdens on employers and smooth administration for the states and their industry partners.
Some Fault One-Size-Fits-All Design
State-facilitated auto-enrollment IRA programs are not without their critics. Some point out program limitations on the amount workers can set aside and prohibitions on employer matching contributions. The U.S. Chamber of Commerce has also noted the programs’ potential to displace existing, high-quality employer-provided retirement plans. Others point to the one‐size‐fits‐all design of auto-enrollment plans as a problem for cash-strapped workers.
Aaron Yelowitz, an economics professor at the University of Kentucky and a senior fellow with the CATO Institute, worries that these policies have the potential to adversely affect individuals with debt and current financial difficulties who do not actively opt out of the plan. “Siphoning off a percentage of their paycheck will likely worsen their overall financial situation” rather than help them succeed in planning for retirement, Yelowitz says. Some observers have suggested an emergency savings or “sidecar” account linked to a retirement savings vehicle as one policy option to address these concerns.
Colorado State Treasurer Dave Young struck an optimistic tone in a November 2021 press release, stating, “This retirement savings partnership between Colorado and New Mexico exemplifies the best in forward thinking and collaboration. Together, Colorado and New Mexico can forge a pathway by working with private sector employers and workers to build retirement savings security for those who might otherwise be left behind.”
Key areas of collaboration between the two state programs include shared program administration and financial services, marketing and outreach, program evaluation, data collection and participant privacy measures. Additionally, the partnership is intended to provide benefits to both states by shortening the timeline for program self-sufficiency. According to an editorial in The Denver Post, the program “will be administered at no cost to employers, with no employer fees or fiduciary liability. The administrative burden will be minimal, with no employer matching contributions, and it will be compatible with payroll systems.”
Similar, Not Identical
There are important distinctions between the two states’ programs that their leadership will need to address. For example, employer participation in New Mexico’s payroll deduction IRA is strictly voluntary, while Colorado’s program has an enrollment requirement for businesses with at least five employees (employers that already offer retirement plans will not be affected). New Mexico has also authorized a new online marketplace, where employers who want to offer their own plans can compare retirement savings options.
Although Colorado and New Mexico have agreed to collaborate, the rollout process may look quite different in each state. Colorado plans for its program to be fully functional by October 2022, while New Mexico’s target date is July 2024. Despite the differing timelines, the eventual implementation of this partnership may contribute to the retirement security of thousands of Coloradans and New Mexicans who currently lack access to retirement savings through their employers.
Annie Miller is an intern in NCSL’s Employment, Labor and Retirement Program.