A significant step towards
auto-enrolment of employees in individual retirement accounts (IRA)
has been taken in the US with the introduction of the Automatic IRA
Act of 2010 by Democrat senator Jeff Bingaman and by Republican
congressman Richard Neal.
The concept of auto-enrollment in
IRAs was developed by US think tanks the Brookings Institution and
the Heritage Foundation as part of their Retirement Security
Project and is intended to benefit nearly two-thirds of American
workers who have no employer-based retirement plan.
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The two organisations estimate that
auto-IRAs would raise net national savings by nearly $8bn
annually.
Auto-enrolment would enable nearly
all employees who work for a private business with more than 10
workers and whose employer does not already offer a retirement plan
to contribute to retirement savings through payroll deductions.
Only business that have been established for at least two years
would be covered by the act.
Under the proposed act employers
have the option of choosing a private sector manager for the
auto-IRAs while allowing each employee the right to transfer, or
simply allowing the employee to designate the provider at the
outset. The bill does not mandate any matching contributions by
employers or any fiduciary responsibility for the management of the
accounts.
Worker contributions would be
deposited into their own IRA managed by insurers, banks, mutual
funds, and other institutions that currently provide IRAs. As a
default, employees would also be allowed to send their
contributions to the Treasury Department for the purchase of
newly-created Retirement Bonds. Contributions would be purely
voluntary and employees would be free to opt out at any time.
“The approach builds on the use of
automatic features in 401(k) plans that encourage employees toward
sensible [retirement savings] decisions while allowing them to make
alternative choices,” said Bingaman. This approach, promoted by the
Pension Protection Act of 2006, has proven highly successful in
raising 401(k) contribution rates, he added. Notably, recent
research from asset management company Fidelity Investments showed
that only 1 in 10 workers eligible for automatic enrollment in
employer-provided plans proactively opted out of the plan.
Bingaman noted that 75m workers –
half of all American workers – have no access to any type of
retirement plan or account at work and only 10% of these workers
seek out their own IRAs or other retirement savings vehicles. About
42m workers are employed by companies with at least 10
employees.
Auto-enrolment IRAs were proposed in President Obama’s fiscal
2011 budget. Given their strong bipartisan support and backing from
organisations including the American Association of Retired
Persons, Consumers Union, and US Women’s Chamber of Commerce, the
Act looks set for a reasonably smooth passage into law.
