03 March 2006

Automatic IRAs -- a Quick Fix for Workers Without Pensions?

The WaPo has an article on the future of retirement benefits and the discussions now taking place.

One of the ideas floated includes an automatic IRA for employees that don't have pension benefits through their employers, either in the form of a true pension or even a 401(k) plan. The idea would be modeled on the Federal Employees Thrift Savings Plan and would allow employees to opt out if they do not want to participate. However, employees would initially be enrolled to take advantage of inertia of most employees.

There are several obstacles. If they make it truly automatic, it would work a lot like Social Security and would essentially tax the poor even more. However, it is the poor that need the help the most, which is why individual Social Security accounts are such a bad idea. If they don't make it truly automatic, many lower income employees would opt out so that they could pay for things like food and rent. Again, these are the exact employees these IRAs are supposed to target.

On the other side, the reason that employers don't provide 401(k)s are anti-discrimination rules to ensure that highly paid employees are not treated better than everyone else and the costs involved of paying a trustee for the plan. This idea would would require all employers offer automatic IRAs, but would allow a tax credit of $250 to offset start up costs. Also, since the plans are straight IRAs, there would be no regulations on highly compensated employees or contributions to be made.

All this might work, but it would really be better to not add to the confusing number of retirement options. One of the great ideas the GOP has had in the past few years was to combine the various retirement accounts into one option. I would love to see everything combined into a 401(k) account with the 401(k) limits. It would level the playing field and not handicap workers just because they work for an employer that doesn't offer a 401(k).

2 comments:

Decline said...

"On the other side, the reason that employers don't provide 401(k)s are anti-discrimination rules to ensure that highly paid employees are not treated better than everyone else and the costs involved of paying a trustee for the plan."

Sorry, but I don't entirely agree with this statement. With the Safe Harbor rules available to 401(k) plans, discrimination tests are pretty much thrown out the door. Any business owner can provide a 401(k) plan and put both deferrals, and employer contributions into the plan without problem. Also, most small plans - the ones reluctant to provide a plan - wouldn't get, or need, a 3rd party trustee. Overall administrative costs, including recordkeeping and custodial services, should cost a small company (under 50 employees) less than 5,000 per year - less if employees bear some of the expenses.

In my opinion, the real reason many smaller companies don't offer a 401(k) plan is because it takes too much effort to get started.

Just my $.02. :)

Kirk said...

I'll have to defer to you on the costs as you are the expert :) My dad's business didn't do one because of the costs involved, but that was also 5-7 years ago and that may have changed since then.

As far as the safe harbors, not all plans fall under them. There have been a few that have failed the non-discrimination test and they've been changed to try and encourage participation by lower-paid workers. This has benefited all employees by making the plans better in order to entice lower income employees to use them.