Democratic Sen. Jeff Bingaman of New Mexico introduced a measure last week that will make it easier for workers with no employer-sponsored retirement plan to save through automatic payroll deductions, which can then be deposited into an individual retirement account (IRA).
Employers with 10 or more employees that don't sponsor a retirement plan would be required to offer an auto-IRA plan through payroll deductions. Failing to offer an automatic IRA will result in an excise tax of $100 for each employee who was supposed to be covered.
Employers will receive a $250 tax credit to cover the administrative costs of setting up the IRA account, but they will not be allowed to make a contribution to it. A summary of the bill states the measure is designed to minimize employers' administrative functions and will involve little (if any) out-of-pocket employer cost.
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"Last year, only half of all American workers had access to any type of retirement plan or account at work. As a result, millions of Americans enter their retirement years with inadequate savings," Bingaman said in a released statement. "Our bill will open the door to a secure retirement for nearly 42 million workers."
Employers will have no ERISA fiduciary liability if they use a provider that is on a list of approved providers or uses R-Bonds.
While employees have the opportunity to contribute outside the workplace to IRA accounts, the IRA participation rate is very low – each year, less than one in 10 employees contribute, according to the senator's website.
Employees can opt out of the program, or a default 3 percent of an employee's will be deducted into their IRA (either a traditional IRA or Roth IRA).
Enactment of automatic IRAs is projected to result in new contributions of roughly $15 billion annually.
The provision will apply only to firms with 100 or more employees in the first year after enactment; 50 or more in the second year; 25 or more in the third year; and 10 or more in the fourth year. The phase-in will enable retirement service providers to prepare for a significant expansion in the number of IRA accounts (through product innovation and marketing) and regulators to address enforcement and other regulatory issues.
The Obama administration has called on Congress to enact an automatic IRA measure, and included a proposal in its FY 2011 budget.
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