Advisers bullish on auto-IRA measure

Insurers, fund companies and advisers who serve small investors are likely to be big winners if the Automatic IRA Act of 2010 becomes law.

Introduced in the Senate Aug. 6 by Sen. Jeff Bingaman, D-N.M., and in the House last Tuesday by Rep. Richard E. Neal, D.-Mass., the bill would require businesses without retirement plans to provide individual retirement ac-counts to employees on an opt-out basis. The concept, developed by the liberal Brookings Institution and the conservative Heritage Foundation, was proposed in President Barack Obama’s budget this year and could raise net national savings by nearly $8 billion annually, according to estimates.

If enacted as is, the law would apply first to companies with at least 100 employees, and then gradually cover companies with as few as 10 employees by 2015.

“Insurers have the infrastructure and distribution in place and a business model that’s tailored toward small account balances,” said Jason C. Roberts, a partner with the law firm Reish & Reicher.

John Hancock Financial Services Inc. and The Principal Financial Group Inc. are already big players in the small-plan marketplace, said Tom Modestino, associate director of Cerulli Associates Inc.

About 90% of The Principal’s retirement plan clients have fewer than 500 employees.

Employees can deposit up to 5% of their paycheck in either a traditional or Roth IRA and choose from three low-cost standardized investment options. If the worker doesn’t make any specific elections, the employer would place the default percentage — 3% of each paycheck — in a Roth IRA.

The investment options would include a principal preservation fund, through which contributions would be invested in bank deposits, insurance contracts or U.S. savings bonds designed for use in auto IRAs; a fund similar to a target date or lifecycle fund; and an alternative-investment option that would have a greater equity component than the target date fund.

The default investment for new participants would be the principal preservation fund until accounts reach $5,000, when the default would become a lifestyle or a balanced fund.

“The thinking is that participants can “set it and forget it’ or, if they want to dial up the equity, they can go to their own financial planner of their choosing,” Mr. Roberts said. “Those who are set to take advantage of the participant advice marketplace can be ready to hit the ground running.”

Financial advisers who charge by the hour and are equipped to serve small accounts also may fare well, said Ryan Alfred, co-founder and president of BrightScope, which rates 401(k) plans.

“It wouldn’t make a lot of sense for participants to be charged 1% fees on their assets,” he said.

Since auto-IRA employers would receive a tax credit of $250 for each of the first two years to defray the cost of adopting the plan and because the plans are easy to administer, some sponsors of small 401(k) plans could decide to switch, industry observers say.

“The new plans would compete with advisers who provide advice to small 401(k)s,” said Brant Griffin, a partner at North Pier Fiduciary Management LLC.

But he views the legislation as an overall positive, and doesn’t expect to lose any business if it becomes law.

“Our average plan size is about $38 million, and the smallest is about $15 million,” Mr. Griffin said. “Larger companies with a sophisticated base need a full-on qualified plan.”

Although he also works with small plans, Jason Hochstadt, vice president of Jedi Management Inc., said that the proposed legislation isn’t a threat because many small-business owners would continue to prefer Simple IRAs and SEP IRAs, which offer contribution limits of $11,500 and $49,000, respectively, compared with the $5,000 limit on IRAs.

The U.S. Chamber of Commerce, which represents business owners, is cool to auto IRAs.

“We’re concerned about seeing this as an employer mandate, but we’re also worried about the potential for unintentional liabilities attached to the employers,” said Aliya Wong, the group’s executive director of retirement policy.

Although the bill’s language exempts employers from fiduciary liability if they use a provider approved by the Treasury Department, Ms. Wong thinks that employees may hold employers responsible for selecting investments.

“It’s not a matter of the business winning or losing a case, but the fact that the case is brought in the first place,” she said, citing the cost of litigation.

Another business group thinks that passage of the bill anytime soon is unlikely.

“There’s a lot for Congress to finish this year,” said Bill Rys, tax counsel at the National Federation of Independent Business, a small-business advocacy group.

E-mail Darla Mercado at [email protected].