After much discussion and anticipation, the Automatic IRA Act of 2010 was formally proposed Friday by Sen. Jeff Bingaman, D-N.M. If enacted, the bill could affect half of the country's working population.
Under the provisions of the bill, employers that do not sponsor a retirement plan and have more than 10 employees would be required to offer an auto-IRA plan through payroll deductions. The employers would contribute nothing to the accounts, but they would receive a $250 tax credit for each of the first two years of the plan's operation.
The law would also be phased in over a period of years, with the rules applying to employers with over 100 employees in the first year after enactment. In the fourth year after enactment, the law would apply to firms with ten employees and more. It would never apply to firms in the first two years of their existence, according to the bill.
Several default investment options are mandated under the provisions of the bill.
First, if an employee does not take any action to sign up, 3% of each paycheck would be automatically withdrawn into an individual retirement account. The default investment vehicle would be Roth IRA.
The default investment in the Roth IRA would be a “principal preservation fund,” or retirement bonds (R bonds), until the balance in the employee's account reaches $5,000 — at which time the funds would move to an approved life-style or balanced fund. No provider is required to accept automatic IRA accounts.
The Treasury Department would be expected to develop a website to list approved providers, and employees also have the option to select their own IRA provider. If an employer does not want to select a provider, the Treasury Department will provide a group of possibilities that have been vetted for the program, and an employer would be assigned to one at random.
Employers have no fiduciary responsibility if they use an approved provider, or the R-bond option.
One industry observer said the measure is a positive move for retirement savings, but that the “devil is in the details.”
“Anything that facilitates savings is a very, very good thing, but the question in my mind is whether or not participants will receive the fiduciary protection they need,” said Matthew Hutcheson, founder of Matthew Hutcheson LLC, an independent fiduciary firm. “What I worry about is that retail brokers and advisers will pretty much own that market.”
The Labor Department will have to promulgate “clear and uniform methods for reporting fees,” according to the bill summary, and providers cannot base fees on low account balances alone.
In his speech introducing the bill last week, Mr. Bingaman said the plan could increase personal savings by as much as $15 billion annually.
“Ensuring easy access to a retirement account and the ability to have part of their wages go directly from their paycheck into this account are proven strategies to encourage retirement savings,” he said. “I call on the Senate to take up this bill in the fall and to include it in legislation extending the 2001 and 2003 tax cuts.”