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Pension law boosts automatic IRA bill

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By Lisa Shidler

August 21, 2006 6:01 am ET

CHICAGO - A bill that would create automatic individual retirement accounts, giving the 71 million Americans without a retirement plan access to one, got a shot in the arm from the new pension reform bill, some financial advisers say.

An automatic IRA would be a major windfall for advisers and, if approved by Congress, is expected to bring in as much as $100 billion in new investments within five years, according to the Heritage Foundation, a conservative think tank in Washington.

Advisers also are excited about the newly created defined benefit 401(k) plan, which was approved as part of the recent pension legislation.

President Bush signed the pension reform bill into law last Thursday.

Although the proposed automatic IRA and recently approved DB(k) are two programs with different niches, advisers are keen on both, because each could provide more opportunities for investors to save, which could lead to more business for advisers.

Filling a void

"Anything that makes saving more automatic, I'm in favor of," said Dennis Lohouse, principal and co-owner of Bryce Capital Management LLC and Bryce Capital Funds in Pittsford, N.Y. His firm has about $125 million under management.

The so-called DB(k) plan is a combination of a 401(k) and the traditional DB plan, and the automatic IRA proposal would allow workers whose companies don't offer a pension to send part of their paycheck automatically to an IRA account.

The proposed automatic IRA is designed to fill a void for the estimated 71 million employees whose employers don't provide any type of retirement savings for their employees, said Mark Iwry, a non-resident senior fellow with the Brookings Institution in Washington.

He is hopeful Congress will vote on the automatic IRA next spring. Although the automatic IRA isn't a plan employers would sponsor, Mr. Iwry said it could lead to more sponsored plans.

"This wouldn't be an employee-sponsored plan, but it would start the conversation," he said. "That's the goal here: to sell more 401(k) plans."

The automatic IRA should be created as simply as possible, said Mr. Iwry, who also is a senior adviser to the Retirement Security Project, a non-profit organization in Washington.

Mr. Iwry and David John, a senior research fellow with the Heritage Foundation, co-wrote the text for the automatic IRA bill.

"This is designed to address the problem the current pension bill doesn't address," Mr. Iwry said.

"What about the other half?" he said. "How can we encourage savings among the 71 million Americans who don't have access to a current retirement plan?"

The proposal for the automatic IRA would feature direct payroll deposits to a low-cost diversified IRA. Employees could use their existing IRAs or get an IRA through an adviser or a national website that would have options available.

Mr. Iwry said the automatic IRA has the potential to spin off into more 401(k) plans because employers would begin to seek advice

from their advisers and realize it wouldn't be that costly to add a 401(k) plan.

"The small-business pension consultants have told us that they endorse this automatic IRA," he said.

"They believe it'll improve their ability to sell plans to small businesses," Mr. Iwry added. "This will be a stepping stone for advisers to sell 401(k)s to the employer."

Building relationships

It would be an opportunity for advisers to build additional relationships and perhaps additional business if an automatic IRA became available, said Karen Remmele, an analyst with Cerulli Associates Inc. in Boston. But she said that many questions could arise about how advisers would tackle this business.

"What it takes is for advisers to figure out who isn't participating and get them to participate," Ms. Remmele said.

"Would advisers be willing to go after these people? Would you see a difference in how they approach this market? Will it be the younger advisers who are building their base?" Ms. Remmele asked.

She wonders if the momentum for the automatic IRA and the passage of the DB(k) plan could cause more advisers to focus on retirement savings more intently.

"This would really throw advisers where they'd be more concentrated on retirement plans, versus right now where there are a lot of people who accommodate retirement without being focused on it," Ms. Remmele said.

While advisers like the simplicity of the automatic IRA proposal, Mr. Lohouse worries that the DB(k) plan will be another complicated product for advisers to learn about, though the DB(k) plan won't go into effect until 2010.

The DB(k) plan is a blend between the traditional DB plan and a 401(k).

It would allow employees to make pre-tax contributions to their 401(k) accounts, including employer-matching funds. Then, the DB portion of the assets could be held in a trust.

The DB plan still remains a promise by the employer to pay a set benefit of at least 1% of the employee's final average compensation per year of service, up to a maximum of 20 years.

Officials at Des Moines, Iowa-based Principal Financial Group Inc. are excited about the creation of the DB(k), said Chris Bowman, vice president of retirement and investor services.

He said that the plan will be

a great move for employers, especially smaller- and medium-sized corporations.

"I don't know that it'll be a huge financial boon for advisers," Mr. Bowman said.

"I think it's another tool for retirement-sponsored programs," he said. "I think you'll see a lot of interest with employers who already have a defined benefit, and they can put the two plans together."

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