Federal auto-IRA would crowd out private-sector plans, critics say

'Why would any business owner maintain a retirement plan if the federal government is going to take over all the costs and responsibility of providing retirement benefits?' says the CEO of a trade group representing plan sponsors.

A federal automatic retirement savings program would undermine retirement plans offered by businesses to their employees, said critics of new federal legislation.

Sens. John Hickenlooper (D-Colo.) and Thom Tillis (R-N.C.) last week introduced the Retirement Savings for America Act, which would establish portable, tax-advantaged retirement accounts sponsored by the federal government. Low- and middle-income workers who use the accounts would be eligible for a contribution match from the government that would phase out at the median income level.

A trade group representing retirement plan sponsors is resisting the idea.

“Why would any business owner maintain a retirement plan if the federal government is going to take over all the costs and responsibility of providing retirement benefits?” said Brian Graff, CEO of the American Retirement Association. “They are creating an unlevel playing field where the federal product is unfairly subsidized relative to the private sector.”

The federal government doesn’t need a new retirement program when the one already in place — Social Security — needs to be fixed, said Angela Antonelli, a research professor at Georgetown University and executive director of the Center for Retirement Initiatives at its McCourt School of Public Policy.

“There is no need for the bill,” Antonelli said. “The federal government instead should be focused on Social Security’s fiscal sustainability.”

Under the Hickenlooper bill, the full- and part-time workers who don’t have access to a company retirement plan would be eligible for an account and automatically enrolled at 3% of their income, according to a fact sheet about the bill. Worker could increase or decrease their contribution and opt out at any time.

Low- and moderate-income workers would be eligible for a 1% automatic federal contribution and up to 4% matching contribution through a refundable federal tax credit. Workers could carry the accounts from job to job.

Reps. Lloyd Smucker (R-Pa.) and Terri Sewell (D-Ala.) are expected to introduce a companion bill in the House.

“Americans who work hard their entire lives deserve to retire with dignity,” Hickenlooper said in a statement. “This bill helps low-income workers enjoy a secure retirement and fulfill their American dream.”

A Hickenlooper spokesperson was not immediately available to respond to criticism about the bill.

The Insured Retirement Institute said it shares the goal of expanding retirement savings opportunities for more Americans but favors different legislation for doing so. The IRI supports an automatic individual retirement account bill that has been introduced in previous congressional sessions by Rep. Richard Neal, D-Mass.

The bill Neal floated in 2021 would require employers with five or more employees that don’t offer retirement plans to enroll their workers automatically in IRAs or 401(k)-type plans. The measure offered a tax credit to offset costs but also imposed an excise tax on businesses that don’t set establish retirement programs.

“It’s a private-sector solution versus a government solution,” said Paul Richman, IRI chief government and political affairs officer. The Neal bill has not been reintroduced in the current congressional session.

IRI, which represents annuity providers, hasn’t taken a position on the Hickenlooper bill. But Richman said its price tag — about $40 billion annually — may prevent it from getting much support in a Congress riven with divisions over funding the federal government.

“It seems to me in the current political environment we don’t have a consensus among the members of Congress to start spending more money when they’re talking about cutting other programs, particularly on the Republican side of the aisle in both chambers,” he said.

Many states have established auto-IRA programs, which generally require employers that don’t offer a retirement plan to allow their workers to sign up for the state plan. The businesses’ role is administrative and they don’t contribute to the plans.

Instead of establishing its own auto-IRA, the federal government should “support the expansion of private-sector retirement plans in combination with the new state initiatives,” Antonelli said.