Tuesday, September 07, 2010
Bill Would Require Automatic IRAs
By Michael Coleman
Copyright© 2010 Albuquerque Journal
Journal Washington Bureau
WASHINGTON — Most retirement experts agree Americans aren't saving enough for their post-work years, and Sen. Jeff Bingaman, D-N.M., has introduced legislation he says could help solve the problem.
Bingaman's Automatic IRA Act of 2010 would require employers with 10 or more full-time employees who don't offer a 401(k) or other qualified retirement plan to establish an automatic IRA (Individual Retirement Account) investment plan.
Workers would be automatically enrolled in the plan and IRA deductions would start at 3 percent of the employees' salary. Employers would not be required to contribute.
Workers who did not want to participate would have to opt out. Those who wanted to contribute more than 3 percent through the automatic deduction mechanism could do that, as well.
Under the Bingaman bill, employers would not be responsible for directing employee investment in the IRA, which could be set up as a traditional or "Roth" account and would be subject to existing tax laws governing each.
"We believe it would significantly increase the amount of retirement savings people would be inclined to engage in," Bingaman said in an interview. "We think if the option was there, they would put funds away for retirement."
Some critics of the plan contend that administering it would be a significant financial burden on small businesses. But Bingaman said his bill includes a tax credit to cover the administrative costs of setting up the IRA account.
David John, a senior research fellow at the conservative Heritage Foundation and a leading expert on federal retirement policy, offered extensive help crafting the bill, Bingaman's office said.
In a Journal interview, John said the automatic IRA proposal makes sense in an age when pensions are becoming a thing of the past and many employers are even abandoning 401(k)s.
"The bottom line is that in order to have a comfortable retirement people are going to have some savings," John said. "Social Security only provides about half the income the average worker needs in retirement. The traditional pension system is rapidly shrinking and it doesn't look like it's going to revive. At this point only about half of the American work force has a 401(k) or a similar type of retirement plan at all.
"This increases the number of people who are able to save for retirement through automatic enrollment and payroll deduction from roughly 50 percent of the workforce to roughly 90 percent of the work force," he added.
According to a 2009 Boston College Center for Retirement Research report, nearly 50 percent of American households will retire without enough savings to maintain their preretirement standard of living.
The Obama administration has called on Congress to enact an automatic IRA measure, and included a proposal in its fiscal year 2011 budget.
Damon Silvers, director of policy and special counsel for the AFL-CIO, said he had not yet analyzed Bingaman's bill and couldn't comment on it directly.
But Silvers said the AFL-CIO has concerns with automatic IRAs in general. First, he said that the program could create a false sense of security about retirement among workers, and that it also lets employers off the hook because they are not required to match employee contributions.
"What's really happened in the last generation is a kind of radical abandonment of employers' traditional responsibility for funding their employees' retirement," Silvers said. "The problem with the auto IRA is that it is simply not serious money in relation to what needs to be put in (a retirement plan) over time. To promote it as a solution is essentially giving employers a pass and misses the mark."
Silvers also said an IRAs are "thinly regulated," which could create problems for investors — especially those who are less sophisticated about finances.
"If you enacted auto IRA today and didn't make any changes to the level of investor protection that IRAs generically enjoy ... we would be swimming in stories of people being taken advantage of in one way or another," Silver said.
Former Rep. Steve Pearce, a Republican who is running to win back the 2nd Congressional District seat in New Mexico, also said he has reservations.
"For the government to be telling private businesses that they're going to have to start a new (IRA) and they won't touch it — I don't trust the government at all," Pearce said.