On the surface, the Obama administration's movement to require every employer to offer workers some form of automatic retirement account is a well-intended attempt to shore up the financial futures of millions — and underneath, it's one that could also pump billions of dollars into the capital markets at a crucial time.
But unless the federal government can get the broad financial services community on board, such a requirement will hardly move the needle and increase retirement savings in this country.
At its core, the administration's plan is conceptually simple: force all employers that do not offer 401(k)s or similar savings vehicles to invest a portion of their workers' pay in direct-deposit individual retirement accounts automatically. With each paycheck, workers would have a portion of their wages deducted to fund the IRA, unless they proactively elected not to participate in the program.
This would affect the 75 million individuals who do not have access to workplace retirement plans, the administration estimates.
That's an assumption that largely has been lauded by scores of retirement advocacy groups in recent weeks.
"But it's much more complex than anyone really appreciates," admitted Dallas Salisbury, president of the Employee Benefit Research Institute, a non-partisan retirement research organization based in Washington. "It's hard to say how effective this will ultimately be, but the devil will surely be in the details."
One key set of details in particular, however, will have to be solidified quickly before the plan can get off the ground, let alone succeed.
At the moment, it's extremely unclear how the financial firms providing IRA services — mutual fund companies, record keepers or investment advisers — would be expected to support the auto-IRA initiative.
It's assumed they will play a critical role in managing the assets of these workers, while also administering the millions of retirement accounts that could quickly materialize when the auto-IRA plan goes into effect next year.
Yet this proposal zeroes in on a marketplace that many of these financial services providers have long avoided because, quite simply, it's made little economic sense.
"There's not a large- or mid-sized employer out there that doesn't offer some kind of retirement plan," said David Wray, president of the Profit-Sharing/401(k) Council of America in Chicago. "What we're dealing with here is almost exclusively a market made up of small businesses, many of which employ low-income workers and experience high levels of turnover," he said.
Translation: the vast majority of the auto IRAs created by the administration's proposal will be minuscule, at first, and financial providers could be forced to manage these accounts at a loss.
At the same time, more than 500,000 small businesses close their doors each year, according to the Small Business Administration — meaning an ever-growing number of small auto IRAs will be scattered across a wide range of employers and financial services providers.
"Servicing thousands of little accounts is a considerable undertaking that requires a great deal of work, and isn't particularly attractive because of the expenses associated with it," said Steve Wilt, a financial adviser and retirement plan specialist at Captrust Financial Advisors in Raleigh, N.C., which manages more than $20 billion in assets.
To this point, Mr. Wray estimates that an IRA must have a balance of at least $10,000 before a financial provider can cover the costs of administering or managing it.
Mr. Salisbury figures the break-even point to be slightly higher, and that it could be closer to $15,000.
Such balances could take many of the millions of individuals who'd be automatically enrolled in these IRAs years to accumulate. Figuring that the median household income at the end of last year was just under $51,000, according to Census Bureau data, a 3% deduction for the typical American would funnel a little more than $1,500 annually into an IRA.
OPPORTUNITIES
"There needs to be some emphasis placed on finding a structure that will make this economically viable because there are opportunities here for providers to grow their businesses substantially," said Beth Almeida, executive di-rector of the Washington-based National Institute on Retirement Security.
The administration may want to consider combining various employers' auto IRAs into larger pools of assets — much like the concept behind multiemployer defined benefit plans, she suggested.
With these plans, which are most typically utilized by union workers, a number of smaller companies contribute to the one single fund that's managed by an outside board of trustees.
By pooling the auto-IRA assets, mutual fund companies, financial advisers, record keepers and administrators could take advantage of the "tremendous economies of scale that 75 million people could provide," Ms. Almeida said.
Because even if only half of the 75 million individuals without retirement plans contribute a small amount — say $1,000 each year — it could still generate more than $37 billion annually in new assets.
Another step could be to modify the tax codes that govern the various retirement saving vehicles available for small businesses, suggested Scott David, president of Workplace Investing at Boston-based
Fidelity Investments.
From a tax perspective, if auto IRAs were treated in the same manner as Keogh plans, simplified employee pensions, or SIMPLE IRA plans, for example, then small business workers' retirement plans would be more "portable," he said. This would allow individuals to have a single account with a larger, more concentrated pool of assets.
Of course, these types of actions won't address all of the issues that such a broad government mandate could potentially create. For in-stance, by requiring employers to adopt retirement plans, the administration could also be forcing these employers to assume some "unwilling fiduciary responsibilities," as the PSCA's Mr. Wray puts it.
But the financial infrastructure supporting the auto-IRA program could prove to be the most critical component of the administration's attempts to implement a far-reaching, progressive retirement initiative.
And with the White House eyeing 2010 as the year it'll flip the switch on these auto IRAs, they have little time to waste.
E-mail Mark Bruno at [email protected].
