Auto-IRA Bill Introduced to Spur Retirement Savings

Bingaman’s Automatic IRA Act of 2010 (S. 3760) enables nearly all employees who work for a private business with more than 10 workers and whose employer does not already offer a retirement plan to contribute to retirement savings through payroll deductions. Worker contributions would be deposited into their own Individual Retirement Account (IRA), ultimately managed by the same banks, mutual funds, insurance carriers, and other institutions that currently provide IRAs, according to a press release. 

That said, employers who do not offer a workplace retirement plan will have to establish an automatic IRA for their workers under new legislation, though they will receive a $250 tax credit to cover the administrative costs of setting up the IRA account.

However, an employer that fails to offer an automatic IRA for its employees is subject to an excise tax of $100 for each employee who was supposed to be covered. Employers who make an innocent error will have the opportunity to self-correct, according to a summary of the bill.

An employer that already maintains a qualified retirement plan is generally not required to offer an automatic IRA, but if an employer generally does not cover employees in a division, subsidiary or other major business unit, the employer would have to provide an automatic IRA to those employees.  Additionally, the provision will not apply to employers that have not been in existence for two full years, nor will it apply to governmental or church employers.

Although any employer of any size can opt in at any time, the legislation does provide for a gradual phase-in, in order to 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”:

• In the first year after enactment, the provision will apply only to firms with 100 or more employees (counting employees who earned more than $5,000 in the prior year);
• in the second year, 50 or more;
• in the third, 25 or more; and
• in the fourth, 10 or more.

As for worker eligibility, employees who have been employed for at least 3 months and employees who have attained age 18 as of the beginning of the year are automatically enrolled in an Automatic IRA, but can affirmatively opt out. 

Additionally, employers will have no ERISA fiduciary liability if they use a provider that is on a list of approved providers or uses R-Bonds as a default investment option (more on that later).  The employer must transmit employee contributions by the end of the month following the month in which the cash would have been paid had it not been contributed to the Automatic IRA (an excise tax will apply if the employer fails to remit on time), and though employers will be subject to self-dealing prohibitions, an employer’s sole disclosure responsibility will be to provide the employee with a standardized form explaining the program and investment decisions. This form will be either attached to the IRS Form W-4 or available from a central website or through IRA providers, according to a summary of the bill. 

The bill sets the default employee contribution rate at 3% (or such other percentage prescribed in regulations), and employees will have the choice of contributing to either a traditional IRA or a Roth IRA (if no choice is made, automatic IRA accounts will be established, by default, as Roth IRA accounts).  Employees can raise or lower their contribution percentage, or can opt-out entirely from the program. 

As for choosing providers, the bill summary suggests that a central online website would be developed by Treasury (possibly by contracting out) that will list providers that meet regulatory requirements to offer Automatic IRA services and to safely hold accounts, and that the employer may also allow each individual employee to send contributions to an IRA provider selected by the employee.

The bill summary notes that the Department of Labor (DOL), in consultation with the Department of the Treasury (Treasury) and the Securities and Exchange Commission, will be “required to promulgate clear and uniform methods for reporting fees. A provider that chooses to offer Automatic IRAs will not be permitted to assess fees based solely on low account balances”.

The bill summary says that, regardless of who maintains the Automatic IRA, all Automatic IRAs will offer the same three standardized investment options (to be developed by Regulations issued by Treasury and DOL). The summary goes on to note that the investment options must be based on low-cost investments, which may include index funds.  The three investment options are:

• Principal preservation fund (which will also serve as a default investment option until the account reaches $5,000, adjusted for inflation, at which point it will be moved to a lifecycle or balanced option)
• Lifecycle or other blended investment option
• Alternative investment option (not as in an “alternative investment”, but rather the summary says that this option – to be described in regulations – “will include a somewhat higher concentration of equities than the life-cycle or blended investment option listed above”).

Future Issues

The bill directs Treasury and DOL to conduct a study of the desirability and practicality of using data on IRA investments to enable individuals with multiple IRA accounts that include small accounts to receive periodic notices informing them about the location of these accounts and how they might be consolidated.

The study will also consider using investment arrangements associated with automatic IRAs to assist in addressing the problem of abandoned accounts.  The bill also mandates that Treasury/DOL study and report to Congress on spousal consent, and potential lifetime income options, for Automatic IRAs.

A summary of the bill is available at http://bingaman.senate.gov/policy/autoirasummary.pdf