Retirement for All

When President Barack Obama released his budget blueprint earlier this year, it included a provision for a mandatory automatic individual retirement account (IRA) program that would extend the retirement savings benefits of automatic enrollment for every worker (at a company with 10 or more employees that has been in business for more than two years) not already covered by a workplace savings plan. Although legislation in support of that notion this year has not yet been introduced, the concept stems from a bipartisan proposal dreamed up in a think tank years ago—which has received bipartisan support on Capitol Hill. The proposal in the budget is similar to those introduced previously through multiple bills in Congress, most recently as the Automatic IRA Act of 2007, notes James Delaplane, Partner at Davis & Harman LLP.

Probably the largest retirement initiative of the Obama Administration is expanding retirement plan coverage, says Brian Graff, ASPPA Executive Director and Chief Executive Officer. According to the Bureau of Labor Statistics, only 67% of private-industry workers have access to either a defined benefit or defined contribution retirement plan. Data from the Employee Benefit Research Institute show that, when workers making $30,000 to $50,000 are covered by an employer plan, 75.3% of them save but, when not covered, less than 5% save on their own.

In general, the automatic IRA proposal would seek to address that issue—pursuing universal retirement­ savings coverage by allowing employees who currently lack access to a qualified retirement plan at work to save for retirement through automatic payroll deposit IRAs.

Concerns

Regarding the proposal’s aim of expanding coverage, the retirement plan community generally agrees that more needs to be done, says Delaplane. However, despite the apparent simplicity of the proposal, there are still significant details missing about how the program would work, and there are concerns that there might be negative effects on the 401(k). “We don’t want to do anything to disturb or undercut the employer-sponsored systems….We don’t want to see people initiate this instead of a qualified plan” he says.

Of concern to many is the potential for “disintermediation”—a concern that smaller employers particularly, given a choice between a 401(k) with its attendant costs and responsibilities, and a government-sanctioned IRA that requires nothing more than directing payroll contributions, would abandon their 401(k), or eschew its initiation in the first place.

These would be IRAs, notes Graff, and therefore would have lower annual contribution limits than qualified plans (in 2009, the annual contribution limit to an IRA is $5,000, compared to the elective deferral limit of $16,500 for 401(k) and 403(b) plans). As a result, Graff says he does not see an incentive for employers with existing 401(k) plans to abandon them for the government alternative and, in fact, the requirement for companies without a program already in place to accommodate a savings plan might even lead some to consider offering a 401(k) plan, he predicts.

Another question is about how much pushback will come from the small-business community. Some small business group’s have expressed concern over the idea but, in general, the small-business community is not going to “fall on its sword” over this proposal, predicts Delaplane.

Implementation

There are also concerns around implementation of the proposal. Graff notes that issues that must be discussed include how the program would be administered and who would invest the contributions. Although there are already direct-deposit IRA programs available through the Department of Labor, many small employers still are not using electronic payroll, notes Delaplane. This could be an area of concern about how to separate wages and how soon those will have to be deposited.

Many employers subject to the terms of the proposal likely are using some kind of automated payroll however, and they surely have the means to collect and deposit income tax and FICA withholding. The withholding for the automatic IRA could be separated and filed alongside the taxes, and those deposits then could be routed to the appropriate account. That said, Delaplane says he expects that these regulations might bring some smaller companies, of between 10 and 50 employees, into the digital age of payroll, when they might not have been in the past.

There is also a disconnect surrounding the costs of the program, notes Delaplane. Although there is an interest in keeping costs down, retail IRAs can be costly and, of course, the industry as a whole wonders whether there is an appetite for recordkeepers to take on these small accounts at such a low price point. There has been some interest in exploring relatively low-cost approaches for the administration of the proposal. The thought from the designers of the proposal is that a program could be direct to individual banks or IRA providers, certainly when accounts get to a certain size. Another idea is that there might be “aggregators” in the private sector who could recordkeep the individual accounts, and funnel them to the appropriate low-cost investment accounts, such as collective trusts, for example.

Two federal programs that have been tossed around in relation to the proposal are the Thrift Savings Plan (TSP) and the TreasuryDirect bond program, notes Delaplane. The idea of allowing small accounts as part of the TSP has been controversial and people in the industry are asking whether there are private-sector solutions that would negate the need to use the TSP, he explains. The notion of using the TSP was introduced into the discussion by reference in an earlier version of the proposal; however, the government anticipates a private-sector solution to this, those familiar with the proposal say. In fact, Delaplane notes, in the outline of the proposal put into the budget write-up in the Treasury Green Book, the TSP is not mentioned as a backstop, signaling some potential flexibility in how to structure the program. The government is just as worried about keeping up with small accounts as the private sector, says Graff. Consequently, the Council of Independent 401(k) Recordkeepers (CIKR) has been looking at options that would keep these accounts in the private sector.

Admittedly, most of these decisions are yet to be made but, ultimately, architects behind the program understand that a significant barrier to small businesses offering retirement programs is a concern about cost, commitment, and liability. Therefore, the concept emerging is that the employer will function only as a facilitator of payroll deposit, and will have no fiduciary responsibility.

Timing

As for timing, “it is not whether it will be done—it’s how,” and when, says Graff. Delaplane agrees, saying that, although there was a sense this could rocket through early, as the weeks go by, it is more likely there will not be prompt action.

Graff says that this is high on the list of Obama’s initiatives and so, if something large like health care gets delayed, the industry might see this pushed through so that the Administration can say it is making progress pushing through significant policies.

It is hard to predict whether this will come together with other initiatives and be part of a large retirement package, or whether it will be a stand-alone solution, Graff says. The fact that it was introduced in the budget shows a level of interest, but still requires legislation to make the proposal turn into law, which has not yet been introduced. Delaplane predicts that the proposal could morph some before it is implemented, but that depends on timing.