Auto-IRAs Would Help Employees Save for Retirement

More than half of the workforce in America lacks access to an employer-sponsored retirement savings plan. Legislation to require employers who do not provide qualified retirement plans to assist their employees in saving for retirement was introduced in the U.S. Congress recently. Meanwhile, some states are developing plans to expand retirement savings opportunities at the state level.

The Automatic IRA Act of 2007 (S. 1141 and H.R. 2167) requires employers to use automatic enrollment and payroll deductions to help employees save in Individual Retirement Accounts (IRAs). Lead sponsors of the Auto-IRA Act include Senators Jeff Bingaman (D-NM) and Gordon Smith (R-OR) and Representatives Richard Neal (D-MA) and Phil English (R-PA).

The Auto-IRA law would apply to employers in business for more than two years and with more than ten employees. Participating employers would receive a temporary tax credit of $25 per enrolled employee to establish automatic IRAs. Employees may opt out of participation. Under federal law, employees may contribute up to $4,000 per year in IRAs (people older than 50 may contribute more), but, unlike 401k or 403b plans, employers are not allowed to match employee contributions to IRAs.

Washington State recently approved a $450,000 appropriation for its Department of Retirement Systems to develop a plan to offer a universal voluntary retirement accounts program for private-sector employees and seek qualification from the Internal Revenue Service to operate the plan on a tax-preferred basis. Some of the features of the Washington voluntary retirement accounts plan are a defined contribution plan with a limited, preselected menu of investment options; administration by the Department of Retirement Systems; investment oversight by the state investment board; tax-deferred payroll deductions; retirement account portability between jobs; and a two-tiered system with workplace-based individual retirement accounts open to all workers and a deferred compensation 401k-type program or simple IRA-type program open to all employers who choose to participate for their employees.

Proponents hope that these “auto-IRAs” will encourage low-income workers to build retirement assets. These IRAs may also be used for first-time homeownership or postsecondary education.

For more information, contact Dory Rand, 312.368.2007.