Coming soon: IRA with bells and whistles

Monday, Dec. 14
Posted 4 p.m. EST

Earlier, I wrote about the possibility of Congress passing a law that requires employers to contribute more generously to workers' 401(k) plans.

Unfortunately, Congress is more attuned to the needs of business than to its constituents, so passage of such a law will not likely happen anytime soon. But another law that would enhance workers' retirement prospects does stand a good chance of passage, says Brian Graff, executive director and chief executive officer of ASPPA -- the American Society of Pension Professionals & Actuaries.

A mandate for small businesses to provide automatic enrollment payroll deduction IRAs for their workers is gaining some heavyweight support, Graff told the South Florida ASPPA Benefits Council at its December meeting.

Such a plan would enable workers at small businesses of 10 or more employees to invest in an IRA via payroll deductions -- without having to sign up for it.

Graff expects President Barack Obama will talk about this in his State of the Union address next month.

The what IRA?

The payroll deduction IRA has been around for a few years, but it hasn't been widely adopted, mainly because employers haven't been required to provide it. But the idea of requiring businesses to do so has gained popularity in recent months. According to Graff, the revamped version with the automatic enrollment feature has widespread support among bigwigs in the Obama administration, including White House Chief of Staff Rahm Emanuel, Office of Management and Budget Director Peter Orszag, White House Economic Adviser Larry Summers and others.

Automatic enrollment has proven to be extremely successful with 401(k) plans, mainly because it requires no effort on the part of workers to sign up. It does require effort to opt out, so few workers exert it. Let's face it, an effortless retirement plan is better than no retirement plan at all.

Small businesses commonly do not offer a retirement plan to their workers, so the automatic enrollment payroll deduction IRA has emerged as the perfect solution.

President Obama spoke about it over the Labor Day weekend in his weekly address, in which he said, "Half of America's workforce doesn't have access to a retirement plan at work. And fewer than 10 percent of those without workplace retirement plans have one of their own."

In other words, if employers don't offer a plan, individuals are not likely to implement their own retirement plan. They've had the opportunity to open an IRA for decades, but, says Graff, "The IRA isn't working. The take-up rate for IRAs is less than 4 percent."

More security for Americans

Requiring small businesses to offer an automatic enrollment payroll deduction IRA will result in a huge increase in coverage of American workers. "Ninety percent of working Americans would have access to a meaningful savings opportunity," says Graff, who says ASPPA stands behind the effort.

The mandate would not be complicated for small businesses to implement, though details have not all been worked out. Businesses wouldn't be required to provide any company match at all (that's too bad), and they wouldn't have to fill out the onerous ERISA-required Form 5500, which is the case with other qualified retirement plans. Contribution limits would be the same as for all IRAs -- currently $5,000 a year ($6,000 for those 50 and above).

This last point might annoy those who might like to save more in a tax-favorable plan. After all, the contribution limit for 401(k) plans is $16,500 in 2009 and 2010 ($5,500 more for those 50 and above). Why not raise the limit for these automatic enrollment payroll deduction IRAs to match that of 401(k) plans?

Because that would encourage businesses to drop the 401(k) plan altogether.

Larger limits "would completely cannibalize 401(k) plans and everyone knows that," says Graff. "If you tell (business owners of any size) that they can save $15,000 and not have to worry about a 5500 form and not have to put in a dime on behalf of any of the workers, show's over. They will run to that thing like no tomorrow."

That would be disastrous -- not only for the 401(k) retirement plan industry, but for American workers who do have access to a 401(k) plan since they would likely lose whatever company match they're getting right now.

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