Automatic enrollment in 401(k) plans has been such a success that a lot of people want to duplicate it with IRAs. Proposals that would require employers to establish automatic payroll deductions for IRAs have been kicking around for a couple years. Now the measure is being called for in President Obama’s budget.
Simply, firms with at least 10 employees that do not offer a 401(k) or similar savings program would be required to set up payroll deductions for an IRA account—and enroll all employees. As with automatic 401(k) plans, an employee would be free to opt out of the IRA program. But the employee would have to initiate the action.
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The opt-out feature is key. When companies began auto enrollment of 401(k) plans about 10 years ago they found that participation rates soared to roughly 90%. Inertia began to work for, not against, workers needing to save for retirement. The feature became so popular that today nearly 40% of employers sponsor an auto 401(k)—up from just 5% in 2005, according to a Schwab report. Of those with such a plan, 37% also automatically increase the size of payroll deductions each year.
The innovation has been widely hailed as a partial answer to the nation’s low retirement savings problem. Why not export the strategy to the IRA universe? After all, about half of all workers have no employer-provided retirement plan. This would fill a huge gap. Auto IRAs are projected to result in new contributions of roughly $15 billion a year.
“If all workers had access to a plan at work we would see staggering increases” in savings, Brian Graff, CEO of the American Society of Pension Professionals and Actuaries, said at a forum on Capitol Hill. In a report, the conservative think tank Heritage Foundation concludes:
“The Automatic IRA … would increase the proportion of Americans who can save for retirement at work from 50% to 90%, make it simple for small business owners to offer IRAs to their employees, and create low-cost accounts that an employee can understand and use without having to be a financial expert.”
Not everyone is on board. Conspiracy theorists believe this is all part of a plan to replace private savings accounts with a government-controlled program that will absorb the nation’s debt through purchases of Treasury bonds. Others believe that the 401(k) plan has been a failure, given the sluggish stock market over the past 12 years. Why should we go even further down this road by investing Americans’ retirement hopes in another market-based system?
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But it seems there is no derailing this train. We need to save more and auto-enrollment works. For most people opting out would be a mistake. Which raises the question: why wait for your employer to enroll you? It’s not that hard to set up your own automatic-debit IRA—apart from anything you have at the office—and get started saving automatically right now.
