Plan for Automatic IRAs Proposed

February 14, 2006 (PLANSPONSOR.com) - A plan for using payroll deductions for automatic individual retirement accounts (IRAs) for employees has been proposed by The Heritage Foundation and The Retirement Security Project, with support from the AARP.

According to a press release, the automatic IRA provides another way for employees of smaller businesses to choose to save for retirement. Over time, this would lead to more plans, encouraging small employers to retain and attract valuable employees by graduating to sponsorship of an actual retirement plan.

The proposal’s co-authors Mark Iwry, senior adviser to The Retirement Security Project and Non- Resident Senior Fellow at the Brookings Institution, and David John, Senior Research Fellow in Retirement Issues and Financial Institutions at The Heritage Foundation, said in the release, “Under our approach, those firms that aren’t ready to sponsor a plan would be called upon at least to let their employees save in IRAs using the same powerful payroll deposit mechanism that drives 401(k)s. This provides an easy and effective way for individuals to take responsibility for their financial futures.”

Employers would inform employees of this savings option and would have the choice to either obtain from each employee a decision to participate or not, or automatically enroll employees (allowing the employee to opt out). Small employers would receive a temporary tax credit for giving their employees access to IRAs through payroll deposit. Small businesses with no more than 10 employees and new start-ups would not be required to provide this access, but would receive the tax credit if they did so.

Under the proposal, employers would not have to maintain a plan, make contributions, determine where or how contributions are invested, or open IRAs. They would also be protected from potential fiduciary liability.

For a copy of the working paper, “Pursuing Universal Retirement Security Through Automatic IRAs,” visit http://www.retirementsecurityproject.org .

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