The Automatic IRA (Auto IRA) is part of President Obama’s 2013 budget proposal and if passed into law, would be similar to the company sponsored 401(k) laws currently in place for businesses. This is not the first time Obama has supported the Automatic IRA but it has yet to become a law. The Auto IRA is currently supported by most Democrats and some Republicans, and is a plan developed by Brookings’ Retirement Security Project along with The Heritage Foundation.
A Gallup poll of economic concerns showed that the lack of retirement savings is the biggest economic concern of Americans. Additional concerns include being unable to pay for medical expenses, maintain their standard of living, keep up with monthly bills and pay for their children’s college education.
The proposed Auto IRA is very similar to the automatic 401(k) law which was passed in 2006. In this law, companies are allowed to automatically enroll employees into company-sponsored 401(k) plans. The result of this law was that millions of Americans started planning for retirement and saving money when they hadn’t been doing so previously — avoiding the last-minute scramble to save for retirement.
Automatic enrollment into 401(k) plans has grown to include 80% of eligible employees, and the increase in retirement plan participation has been experienced across all income levels, ages, gender and ethnicities.
Eligibility for an Auto IRA
At this time, the Automatic IRA has not been passed into law, but the proposal is that small businesses with ten or more employees in operation for at least two years would be required to offer a company IRA.
An employer would be required to enroll employees automatically into the IRA unless the employee chose to opt out. Even businesses that do not currently offer a retirement plan to their employees would be required to offer one; and that means about 50% of the workforce (approximately 75 million workers) would have a retirement plan they didn’t have prior to the passing of the Auto IRA rule.
In theory, increasing the number of US workers with a retirement plan seems like a great idea, especially considering it is a top concern for many Americans. The underlying issue is that it requires small business owners to research the different IRA options and get accounts set up for their employees – and this is not a free process.
While there may be credits or incentives provided to business owners through the government which would help reduce the expenses to small business owners, other people argue that forcing businesses to enroll employees in IRA plans would remove the freedom of individuals to choose whether or not they want the plan in the first place.
Do it yourself
Individuals have always had the right to open their own IRA, but studies have shown that only 5 to 10 percent of workers with access to IRAs without an automatic payroll deduction take advantage of their eligibility and open a retirement account.
With the expectation that Social Security will not have adequate benefits to support everyone as they reach their retirement years, retirement savings have become a national problem. The Auto IRA would increase the number of people who can make contributions to their retirement account automatically through payroll deductions, which should help generate more financial security as people approach their retirement years.
If you are self-employed or work for a company that does not offer a retirement plan, there are options for you to set up a retirement account and start saving either by making a deposit into the account each month or setting up automatic transfers from your bank account to your retirement account. Retirement accounts can be opened online through online brokers, or through financial institutions.