Congress takes another shot at federal auto IRA

Employers nationwide would be required to sign workers up for individual retirement accounts or provide their own retirement plans, if a group of legislators has its way.

Wednesday, Rep. Richard Neal, D-Mass., reintroduced a bill to establish a federal automatic IRA system. The auto IRA would complement numerous initiatives passed by states, some of which have been up and running for years.

Industry trade and lobbying groups rushed to praise the bill and urge its passage, which will be a challenge, considering the lack of Republican support for a federal auto IRA in the past few years. Proponents say it would be the most effective way to improve retirement saving in the US.

It’s not a new idea – the concept dates to 2006. While efforts led by Democrats to pass such legislation have failed several times to get enough support, the reintroduction clearly shows they're not giving up on it.

This time around, Neal, who chairs the Ways and Means Committee, made some tweaks to his proposal that could make the GOP more receptive to it. First, the bill would apply to employers with more than 10 employees, rather than five, as previously written. Exempting the smallest businesses from having to make IRAs available to workers could help get the bill over the line, said Mark Iwry, nonresident senior fellow at the Brookings Institution and visiting scholar at the Wharton School.

“While the favorable proof of concept from state-facilitated auto IRAs shows there is no policy or practical reason to deny the auto IRA to workers whose employers have fewer than 10 employees, this concession might be what it takes to obtain the small amount of additional support Mr. Neal – very possibly once again chairing the Ways and Means Committee during the crucial 2025 congressional tax bill negotiations – will need to finally get the auto IRA enacted into law,” Iwry said in an email. Iwry drafted the original automatic IRA proposal along with Brookings nonresident senior fellow David John.

“The Auto IRA bill would make the most dramatic breakthrough ever in expanding coverage,” Iwry said. “It has been estimated that these nationwide auto IRAs would extend coverage to most of the 55 to 60 million uncovered workers, especially in synergy with the expanded saver’s credit match enacted in SECURE 2.0 – and without in any way competing with or crowding out the existing employer-sponsored 401(k)s and other retirement plans.”

The latter was a sticking point with legislation introduced last year by Sen. John Hickenlooper, D-Colo., and Thom Tillis, R-N.C., which seeks to build a federal savings plan for all workers who don’t otherwise have access to 401(k)s or other employer-sponsored vehicles. Industry groups are staunchly opposed to that idea, as they say the government would be competing with private-sector retirement plan providers.

Neal’s proposal would apply to businesses that don’t have retirement plans or don’t participate in any state-facilitated programs by 2027. Employers would choose their provider, and workers would automatically be enrolled in either a traditional or Roth IRA, contributing at least 6 percent of their income, escalating that by 1 percentage point per year, until contributions reach 10%.

The default investment in the IRAs would be target-date funds, but investment menus would also have to include principal-preservation funds, balanced funds and any others that later could be required by the Treasury. Additionally, the bill would require defined-contribution plans with more than 100 participants to offer lifetime-income options like annuities – a detail that the insurance industry is strongly supporting.

If the bill becomes law, the Treasury would be directed to issue guidance to determine how gig workers, freelancers and self-employed people would participate.

Industry groups including the American Retirement Association, the American Council of Life Insurers and Finseca heaped praise on the proposal.

“ACLI estimates that more than 31 million workers will gain access to employer-based retirement plans if the legislation is adopted,” that group’s CEO, Susan Neely, said in a statement. “Representative Neal’s bill represents a bold approach to boosting workers’ retirement savings.”

Neal’s focus on retirement savings, as has been shown in numerous bills, “is commendable,” Finseca CEO Marc Cadin said in a statement.

“With the insolvency of Social Security looming too, we're on the brink of a financial crisis, and the Automatic IRA Act of 2024 promises to boost retirement savings for millions, especially benefiting young and low-income workers lacking access to workplace savings,” Cadin said.

TIAA CEO Thasunda Brown Duckett pointed to 19 state-facilitated programs, noting in a statement that “a federal program would help ensure workers’ pathway to retirement security no longer depends on their employer or state.”

“Further, the Automatic IRA Act would provide savers with critical access to lifetime income options designed to provide a paycheck throughout retirement," Duckett said. "The certainty of a ‘paycheck for life’ will help reduce the risk retirees will outlive their savings in retirement.”