No Retirement Plan? Obama Seeks Auto Enrollment in IRAs


By Stephen Miller March 6, 2009

As part of his retirement security agenda, President Obama proposed in his fiscal year 2010 budget that employers who do not currently offer a retirement plan be required to enroll their employees in direct-deposit individual retirement accounts (IRAs), and to automatically defer a portion of their salaries into these accounts. Employees could opt out of the automatic-enrollment IRA savings program.

Small businesses with no other retirement plan may currently provide employees with voluntary payroll-deduction IRAs or other defined contribution retirement plan options (see Primer: Small Employer Pension Plans). But the president's proposal, which must be passed by Congress, would mandate the following new components:

Employers who do not currently offer a qualified retirement plan would be required to enroll employees in a directdeposit IRA compatible with existing directdeposit payroll systems.

Employees could optout by signing a waiver.

Employers would retain the right to change their savings levels, reallocate investment portfolios or end contributions to the account.

Small businesses could direct the IRS to deposit employees' tax refunds into their direct-deposit IRAs for those who chose to save a portion of their refund.

After employment, the employee's savings could be rolled over into a new employer’s direct-deposit system to ensure continued savings.

The proposed mandate is expected to apply to businesses (but not churches or governments) that are at least two years old and that have more than 10 workers who made at least $5,000 in the preceding year.

"Experts estimate that this program will dramatically increase the savings participation rate for low and middle-income workers to around 80 percent,” according to the president's budget outline, released on Feb. 26, 2009. "Nearly half of American workers — an estimated 78 million — currently have no employer-sponsored retirement savings plan," the outline states.

According to the Society for Human Resource Management's 2008 Benefits Survey report, 92 percent of HR professionals said their organizations offered at least one type of employee retirement plan, including:

  • Defined contribution retirement plans (84 percent of respondents).
  • Traditional defined benefit pension plans (33 percent).
  • Roth defined contribution plans (21 percent).
  • Cash balance "hybrid" pension plans (9 percent).

In addition, 75 percent of HR professionals said their organizations provided an employer match on some or all of the employee’s contributions, increasing the overall value to the employee.

Cost and Complexity Concerns

"President Obama’s budget contains well-intended enhancements to increase retirement savings, but Congress should carefully examine them for unintentionally harmful consequences," commented David Wray, president of the Profit Sharing/401k Council of America (PSCA), a nonprofit representing 1,200 employers, in a statement.

Wray applauded the president’s efforts to increase retirement savings by those who are not offered a retirement plan at work, but he raised concerns about the Automatic Workplace Pension proposal's effectiveness, cost and complexity. "A government-mandated program is very different from an employer proudly sponsoring a retirement plan to attract and retain employees and personally encouraging workers to participate," Wray said. "A better approach might be to explore ways to increase voluntary small business retirement plan coverage before embarking on a mandatory program that may unintentionally make it more difficult for small employers to succeed."

A Saver’s Credit Match

The president's budget also proposes to expand the saver’s tax credit to increase incentives for moderate- and low- income workers to save in 401(k)s and IRAs. The existing saver’s credit would be modified to provide a 50 percent government-paid match on the first $1,000 of retirement savings for families that earn less than $65,000. The proposal would exclude retirement plan savings from means testing for public assistance programs.

The budget outline indicates that the saver’s credit and automatic IRA proposal combined would cost $13.9 billion from 2010 through 2014. The program, which would require legislation, would fall under the Department of Labor.

Stephen Miller is an online editor/manager for SHRM.

Related Articles: External

Mandatory Retirement Policy Creeps Closer, Pensions & Investments, March 9, 2009

Savings Accounts for All: Simple, but Not Easy, New York Times, March 6, 2009

Related Resources: DOL

Payroll Deduction IRAs For Small Businesses, U.S. Department of Labor, 2007

SEP Retirement Plans For Small Businesses, U.S. Department of Labor, 2007

SIMPLE IRA Plans For Small Businesses, U.S. Department of Labor, 2007

Related Article: SHRM

Primer: Small Employer Pension Plans, SHRM Knowledge Center, February 2004

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