The guru of federal retirement policy has high hopes for one of his yet-to-be-approved retirement creations: the automatic IRA.
J. Mark Iwry, deputy assistant Treasury secretary for retirement and health policy, thinks that “millions” of Americans would take advantage of an automatic individual retirement account, which would work through payroll deductions.
Speaking to a group of journalists in Washington last week, he said that auto IRAs would go a long way to help the approximately half of U.S. workers who don't have access to a workplace 401(k) plan.
Congress is working on a draft of auto-IRA legislation, which was introduced in President Barack Obama's fiscal-2010 budget. Washington insiders don't expect it to be approved until next year at the earliest.
Under the proposal, employers with at least 10 employees would be required to offer workers a retirement saving option through payroll deductions, and those who didn't sign up would be enrolled automatically.
“The idea is to expand coverage and saving by building on the basic elements of our current system that work particularly well — payroll-based saving at the workplace, plus automatic enrollment, which has been very successful in raising takeup rates and encouraging saving,” Mr. Iwry told reporters at a National Press Foundation seminar on retirement.
The auto-IRA proposal has strong support on Capitol Hill and from advocacy groups such as AARP, but some groups oppose it as being too burdensome for small employers.
This year, The Spark Institute Inc., a group that represents retirement plan service providers, released an alternative proposal for a new Universal Small Employer Retirement Savings Program that would “simplify” investment option selection and fiduciary-liability concerns, as well as plan administration and documentation, according to the group.
These are the types of issues being discussed and worked out in Washington, said Mr. Iwry, who was a fellow at The Brookings Institution. Some decisions have already been reached, he said.
For example, automatic-IRA plans would likely include default provisions for participants who hesitated to choose, such as a default option for Roth IRAs and a “diversified life-cycle-type option” like a target date fund.
Small employers also would be free to select a financial services firm to run the plan, or to use one offered as a default provider.
“There are several ideas for how to set that up which are under discussion,” said Mr. Iwry, who developed the auto-IRA concept while at Brookings, a liberal think tank, with David C. John, a research fellow at The Heritage Foundation, a conservative policy research group.
“The market would work; this would be a market-based approach,” Mr. Iwry said.
“If the employer has a relationship with a financial institution that provides IRAs, why not build on that if they wish? But if they wanted to go elsewhere, they could,” Mr. Iwry said.
When it comes to choosing default investments, the administration would “borrow a leaf from the book” of qualified default investment alternatives, he said.
“We would build on what those regulations have done with respect to default investments for 401(k)s but keeping it simple, low-cost, and limiting the number of options, including a diversified life-cycle-type option and a safe principal-preservation-type option,” Mr. Iwry said.
Some have said that the auto-IRA plan amounts to a lot of work for very little return, but even a small improvement in the savings rate is better than none at all, said Dallas L. Salisbury, president and chief executive of the Employee Benefit Research Institute. “The nature of the American system has always been incremental change,” he said.
“Even an added 10 million who are building savings in a changed IRA system helps build economic security. Congress will evaluate whether that is enough positive change to justify enactment into law,” Mr. Salisbury said.
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