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Automatic IRA has nice payoff

By Jennie L. Phipps ·
Thursday, August 12, 2010
Posted: 4 pm ET

Saving for retirement is easier if you don't have to think about it.

Proposals for making IRA contributions automatic have been introduced in both the U.S. House and Senate. by Rep. Richard Neal, D-Mass., and Sen. Jeff Bingaman, D-N.M., respectively.

The plan is simple. Employees age 18 and older who have been employed for at least three months would be automatically enrolled in an IRA.

A Roth IRA with a 3 percent contribution deducted from pay would be standard, although workers could raise or lower the contribution, or opt out, and they could choose a traditional IRA if that held more appeal.

Unless new savers chose another kind of investment, the money would be placed in a Treasury Retirement Bond, know as an R-Bond, which would be a new Treasury option. Once the employee had saved $5,000, then future contributions would be invested in a lifestyle or balanced mutual fund.

Employers would pick the company that would provide the IRA, but only providers that met regulatory requirements would be on the acceptable list.

Employers wouldn't have to match the contributions, but they would be compelled to participate. In the first year, the legislation would only apply to companies with 100 or more employees earning more than $5,000. In the second year, the threshold would fall to 50 employees, 25 in the third year and 10 in the fourth year after adoption. To offset the cost of setting up the plans, employers would receive a $250 tax credit for two years. Failure to participate would cost employers $100 for each employee they didn't cover.

Employers that already offer a retirement plan are exempt.

Support for this retirement planning measure appears broad-based, although you can find some grumbling among employers who object to any kind of government regulation. Bingaman said in a statement that as many as 42 million workers would benefit from the bill and new contributions would initially add up to $15 billion per year.

I did the math for a person making $10 per hour for a 40-hour week starting at age 18 and continuing until he retired at 67 -- an admittedly, unlikely scenario since most people don't go through life without getting a raise or having some breaks in employment. But if this hypothetical 18-year-old put $624 in his account annually and it earned a conservative 4 percent, by the time he retired at 67, he would have $94,640. If he were able to earn 5 percent, he would have $130,009, a nice retirement nest egg.

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