White House backs Roth IRAs as default pension investment vehicle

Retirement savings for workers automatically enrolled in individual retirement accounts under the administration’s fiscal-2011 budget proposal would be invested in Roth IRAs — unless they chose otherwise.
That detail about the automatic-IRA proposal emerged today from the administration.
Under the proposal, employers who did not offer their employees retirement plans would be required to make payroll deductions of up to 3% of employee salaries into the “automatic IRAs,” unless employees specifically elected not to participate in the program.
The automatic IRA would be deposited in accounts provided by the private sector, and employees could choose whether the IRA would be a traditional IRA or a Roth IRA, according to a senior administration official who spoke at a briefing this afternoon. The officials spoke on the condition that they not be identified.
Contributions to traditional IRAs can be deducted for tax purposes. Contributions for Roth IRAs cannot be deducted for the year in which they are made, but withdrawals of earnings and principal made during retirement are tax-free.
“The default type of IRA, if the individual did not choose between Roth and traditional deductible IRA, would be a Roth,” the official said.
Funneling retirement savings into the non-deductible Roth IRAs — rather than traditional IRAs — would generate greater tax revenue for Uncle Sam, at least initially. Estimates put the additional tax revenue at $10 billion over the next 10 years. That windfall would cover the cost of providing tax credits for small employers to set up new retirement plans for employees.
Employers with more than 10 employees in business for at least two years would be subject to the automatic-IRA requirements under the proposal. Employers would not have to choose investments. Instead, a “low-cost, standard type of default investment and a handful of standard low-cost investment alternatives” would be prescribed by law or regulation, according to the “green book” budget summary issued by the Treasury Department today.
Another provision in the budget would make it easier for holders of annuity contracts to trade in their annuities for “partial” annuities. Currently, annuity holders must terminate their annuities to annuitize only a portion of the contract. The administration estimates that the provision would cost about $1 billion over 10 years as more people converted part of their contracts to annuities.
“We’re huge supporters of that provision,” said Alane Dent, vice president of federal relations for retirement security of the American Council of Life Insurers. “We believe that more people who take advantage of guaranteed lifetime income are in a better position to achieve retirement income security.”
Similar legislation has been introduced by Rep. Earl Pomeroy, D-N.D.
In a separate proposal, the Internal Revenue Service would be given the power to reclassify workers regarding their tax status if they found them to be classified improperly under the budget proposal. The IRS also would be given the power to issue guidance for employers to make determinations regarding whether employees should be treated as independent contractors.
The guidance would be prospective and would first focus on industries where there had been major problems, according to another senior Treasury official who spoke at the background press briefing. “If the IRS finds an error in how somebody’s being treated for tax purposes, then going forward, it should be treated properly,” the official said.
The IRS is currently prohibited from issuing guidance to employers on what constitutes independent-contractor status, and there are limits on the IRS’ ability to reclassify workers that are deemed to be misclassified, the official said.
The proposal is “just sound tax administration for both taxpayers and for the IRS,” the official said. Rules regarding how to classify workers for tax purposes are based on common law, and there is not one source that employers can look to for guidance in how to apply the complicated rules.
“There’s no desire to fundamentally change the rules with respect to independent contractors,” the official said.
The independent-contractor issue has been a major concern for brokerage firms. Many registered representatives at independent broker-dealers are treated as independent contractors by the brokerage firms with which they are affiliated. Changing their tax status would reduce their independence, industry groups argue.