From the June 2010 issue of Treasury & Risk magazine

Auto IRAs on the Way?


Since many workers don't have defined-contribution plans like 401(k)s to help them save for retirement, the automatic IRA proposal backed by the Obama administration is "the best idea out there right now" for improving Americans' savings habits, says employee benefits lawyer Fred Reish of Reish & Reicher in Los Angeles. Substantial evidence shows that people save more with payroll deferral plans, but the Government Accountability Office estimates 40% of U.S. workers are employed by companies that don't offer such plans--or any plan..

That's why Reish applauds the auto IRA proposal in the administration's 2010 budget, reasoning that there should be "almost no cost" to the small and midsize companies that would use it.

Two bills on this issue are expected to be reintroduced in Congress that would require businesses that are at least two years old and have 10 or more workers to automatically enroll employees in an IRA. Employees would have a chance to opt out.

The proposals would not directly impact companies that already sponsor retirement plans. But consultants and employer organizations have expressed concern than some companies could view auto IRA as a substitute for potentially richer retirement plans like 401(k)s, whose contribution limits substantially exceed the typical IRA's.

"We'd like to see more [generous] coverage in general, and in terms of the auto IRA itself we would prefer to have it voluntary, with incentives for employers to put it in," says Jan Jacobson, senior counsel for retirement policy at the American Benefits Council.

Critics point out that the initiative may leave out many of the workers needing it most. "Probably two-thirds of folks who aren't offered a plan work for firms with 10 employees or less," says Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401k Council of America.

The consumer protection-focused Pension Rights Center (PRC) has a number of concerns, including the prospect that the 10% penalty tax incurred for early IRA withdrawals may disproportionately hurt lower-income workers, since they're most likely to find they need the money before retirement.

Finally, benefits experts say it's not clear the automatic IRA proposal has the political legs to succeed in Congress this year.

"Following the tough legislative battle over healthcare, there is not a lot of time or energy remaining on the legislative calendar to address a new government-sponsored retirement program," says Kathryn Ricard, senior vice president for retirement policy at the ERISA Industry Committee.

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