Automatic enrollment IRAs are an idea that won't go away.
Most recently, they were featured in the White House's Middle Class Fairness initiative. As proposed, all employers with 10 or more employees who do not offer a workplace retirement plan would be required to automatically enroll all eligible workers in IRAs with a default investment choice. Employers would be given a generous tax credit to defray administrative expenses – $3,000 per year, plus a start-up bonus of $1,500 in the first year.
It doesn't sound like a bad deal for employers. But what, exactly, is in it for employees? After all, any working person who doesn't have a company plan already can open a personal IRA and have almost unlimited investment choices.
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The best answer may be that this administration (and perhaps others to follow) wants to move younger workers toward retirement plans with pension-like features, to cushion the inevitable limits and disappointments of Social Security. If you want to help middle-age and younger clients see the big picture of their retirement plans in the future, this is the story to follow.
The groundwork for new small business retirement plan initiatives was laid by a 2013 Government Accountability Office study showing that only 14% of small employers sponsor retirement plans. The cost of plan administration and the complexities of investment menus were cited as major obstacles to small-employer plan adoption.
One solution for eliminating obstacles is a Multi-Employer Plan, or MEP, which would allow several small companies to enroll participants in a 401(k) offered by a third party, with unified administration and one combined Form 5500 filing.
A related initiative is The Small Business Add Value for Employees Act of 2014, which would promote automatic participant IRA contributions in SIMPLEs, with automatic deferral rates starting at 4% of salary and escalating 1% per year. The bill has bipartisan support in Congress and could become priority legislation in 2015.
Also, check out a recent interview by Annuity Digest with J. Mark Iwry, the Treasury Department's retirement plan guru, in which he describes Treasury's desire to add more pension-like features for 401(k)s and an auto-IRA with a single default investment choice.
What might that default choice be? For some time, Iwry and others have proposed creation of a new type of U.S. Treasury bond exclusively available to retirement plans – an "R-bond." You can read more about it by clicking here.
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