A new bill aims to expand retirement security for millions of U.S. workers by requiring employers that have more than 10 workers but do not offer a retirement plan to automatically enroll employees in individual retirement accounts (IRAs) or other automatic-contribution arrangements, such as 401(k) plans.
The Automatic IRA Act of 2024 was introduced Feb. 7 by Rep. Richard Neal, D-Mass., who first introduced a similar bill in 2017. Neal, who serves on the House Ways and Means Committee, also worked on the SECURE Act 2.0 and tried to include similar provisions when that legislation was passed in late 2022.
The Automatic IRA Act would generally apply to plan years beginning after 2026.
The legislation, according to a fact sheet released by Ways and Means Committee Democrats, would “dramatically expand retirement coverage of employees, gig workers, and other independent contractors. It would build upon, expand, and improve the private pension system in a manner that explicitly protects and complements employer-sponsored plans and arrangements.”
It “also would build on, expand upon, and protect the growing state-facilitated automatic IRA retirement saving programs, which continue to pilot and give proof of concept to the proposed nationwide automatic IRAs,” according to the fact sheet. Nineteen states have state-facilitated retirement programs for private-sector workers, with a mix of automatic IRAs, multiple employer plans and other models, according to Georgetown University’s Center for Retirement Initiatives. The Ways and Means Democrats said the auto-IRA has been essential in helping to close coverage and savings gaps along racial, ethnic, gender and income lines.
The Automatic IRA Act would create a new tax credit of $500 per year for three years for employers of up to 100 employees that offer enrollment in either a state or national automatic IRA.
The legislation would allow several exceptions, including companies with 10 or fewer workers, those already offering a qualified plan, those in business for less than two years, or those with governmental plans or church plans. It also would not affect workers currently enrolled in a state-sponsored plan.
Workers also could decline to participate or could drop out at any time after enrollment.
The legislation would require all automatic contribution plans or arrangements, such as a 401(k), to default at a minimum contribution of 6 percent. Then, the contribution rate must automatically increase by 1 percent annually until reaching 10 percent.
With respect to 401(k)-type plans with more than 100 participants, the legislation requires that such plans permit participants to elect to receive at least 50 percent of their vested account balance in the form of lifetime income. This requirement does not apply for participants with balances of up to $200,000.
For automatic IRAs, the exact level of default contributions is not left to the employer’s discretion. The set level for default contributions is:
- Year 1: 6 percent.
- Year 2: 7 percent.
- Year 3: 8 percent.
- Year 4: 9 percent.
- All subsequent years: 10 percent.
The fact sheet also stated that automatic IRAs must offer employees a target date fund, which must be the default investment; a principal preservation fund; a balanced fund; and any others that might be added by the Treasury Department in the future, but no other investment alternative. In general, for other automatic contribution plans and for state-based auto IRAs, current law applies with respect to investments.
Many industry insiders and groups came out in support of the bill after it was introduced. Automatic plan enrollment, and employer support for better preparing workers for retirement in general, has long been touted as a way for employees to better prepare for retirement.
The American Retirement Association backed the proposal, saying it would “dramatically expand retirement coverage of employees, gig workers, and other independent contractors.”
The Insured Retirement Institute also praised Neal’s “steadfast leadership and advocacy of this legislation to help America’s workers, retirees, and their families build economic equity, strengthen financial security, and protect income in a sustainable manner to last throughout their retirement years.”