During his 2010 State of the Union address and in his fiscal year 2011 budget proposal, President Barack Obama encouraged Congress to pass several retirement savings initiatives. The proposals he mentioned or that were outlined in a fact sheet released by the White House include:
• Establishing a system of automatic individual retirement accounts (auto IRAs) in the workplace by requiring employers with more than 10 workers (and in business for at least two years) who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA. Under the administration's proposal, 3 percent of employee pay would be direct-deposited into a Roth IRA. Some of these individual contributions would be matched by a tax credit provided by the government.
Workers may opt out, chose a traditional IRA, or elect to save a different amount. Types of default investments within the IRA would be prescribed by law or regulation.
• Increasing the clarity of 401(k) plan fees through expanded mandatory disclosure.
• Requiring clearer disclosures of the risks of funds offered to employees as 401(k) retirement plan investment choices.
• Encouraging plan sponsors to give workers access to impartial retirement advice from an independent third-party provider distinct from the plan administrator.
• Promoting the use of annuities to generate retirement income.
Mandating Auto IRAs
The most controversial initiative among those mentioned by the president is his auto IRA proposal. The National Small Business Association (NSBA), a not-for-profit advocacy group representing more than 150,000 U.S. small business and entrepreneurs, responded with a statement saying that such a new mandate "could come at a cost to small business. The idea behind the proposal, enhancing savings of America’s middle class, is a noble one. However, putting the responsibility on one of the most hard-pressed and financially strapped segments of today’s economy—small business—is not only unfair, it could be very problematic for some small businesses and their employees."
"There has not been enough consideration of how mandated IRAs would impact small businesses, particularly restaurants and retailers, that don’t use a payroll company or participate in direct deposits," said Keith Ashmus, NSBA chair and co-founding partner at law firm Frantz Ward in Cleveland. "According to an informal poll of our members, less than half use a payroll company. Among those that do, the cost ranges between $300 and $1,000 per month."
ASPPA Backs Plan
On the other hand, the American Society of Pension Professionals & Actuaries (ASPPA), a national organization of U.S. retirement plan and benefits professionals, came out strongly in favor of the proposal. “More than half our workforce—roughly 75 million working Americans—face the challenge of saving for retirement without access to an employer-sponsored plan such as a traditional pension or 401(k). We support President Obama’s 'Automatic Individual Retirement Account' proposal that benefits both small employers and employees by offering an easy way to accumulate retirement savings through an automatic payroll deduction IRA program," said a statement from Brian Graff, ASPPA's executive director and CEO.
"Since contribution limits for IRAs are less than for employer-sponsored 401(k) plans, auto IRAs are expected to expand the availability of retirement savings, not replace current 401(k) plans," Graff added. ASPPA was joined in its endorsement by another professional association, the Council of Independent 401(k) Recordkeepers.
Just a First Step
The not-for-profit Pension Rights Center, an advocacy group that supports expanding government-secured retirement benefits, also applauded the auto IRA proposal but added that it was "only a starting point for reform."
"As it currently stands, the proposal will only marginally increase retirement savings for those who can afford to contribute. It will not do enough to address the retirement income crisis that is engulfing the country," the group said. Moreover, "The auto IRA does not cover everyone. The Obama administration proposal provides an exception for employers that have 10 or fewer workers, which means that at least 18 million people would not be covered by the plan. This represents about 15 percent—and the fastest growing sector—of the private workforce."
The American Benefits Council, a national trade association representing large U.S. companies that sponsor employee benefit plans, urged a bipartisan approach to fostering retirement security. "The council has long championed workplace and personal savings programs that help Americans achieve retirement financial security. But efforts to encourage broader savings by individuals and small businesses should not unintentionally complicate sponsorship of plans by major employers that typically provide the most comprehensive benefits,” said a statement by Council President James A. Klein, referring to the proposals affecting 401(k) fees and disclosure.
“President Obama wisely spoke about the critical need to save current jobs and create new ones” Klein added. “An essential element of his jobs initiative must be enactment of funding relief for defined benefit pension plans. Many companies are facing artificially inflated pension funding obligations when they should be spending that money on job creation and capital investment. Enacting pension funding relief would save jobs and promote business growth," Klein advocated.
Stephen Miller is an online editor/manager for SHRM.
Related Articles:
In Speech, Obama Shifts Attention to Job Creation, HR News, January 2010
Pension Funding Levels Rebound; Still Below 2007 Levels, SHRM Online Benefits Discipline, January 2010
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