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Are Automatic IRAs an Answer to America’s Retirement Crisis?


Are Automatic IRAs an Answer to America’s Retirement Crisis?

It’s no longer headline news that Americans are not saving enough for retirement. According to the National Institute on Retirement Security, when all working-age families are counted, the typical family has only a few thousand dollars saved for retirement. The U.S. retirement savings deficit is between $6.8 and $14 trillion, depending on the household assets.

There are many thoughts about how to bridge the savings gap, one of them is auto-IRAs, (automatic IRAs). The Obama administration has called for federal legislation on auto-IRAs, bills have been introduced in Congress, and a few states (notably Illinois) have enacted or are considering their own auto-IRA laws in an attempt to increase retirement savings, according to the Employee Benefit Research Institute (EBRI).

For example, some states would require many businesses that do not offer a qualified retirement plan to use their payroll systems to automatically offer IRAs to their workers. Employers wouldn’t have to contribute to the accounts and workers would be able to opt out.

However, the question is, how much would auto-IRAs help? An analysis by EBRI found the answer isn’t black or white, but depends largely on age, the default contribution rate, and the opt-out rate (the percentage of eligible employees who choose not to participate).

There’s much debate about auto-IRAs. "Right now, federal law determines the landscape for retirement plans. To have each state circumvent these laws might be problematic, especially for retirement savers who live and work in multiple states, or for those workers that change jobs between the states. The downside is that we might end up with the same state-by-state mess for retirement plans that we now see with state-by-state rules for health insurance," warns Christopher Carosa, president of Carosa Stanton Asset Management.

a few states (notably Illinois) have enacted or are considering their own auto-IRA laws in an attempt to increase retirement savings

Requiring small companies to offer automatic IRA accounts to employees is a good idea in theory, says David Twibell, president of Custom Portfolio Group, "But I’m not sure it would work out that way in practice though, primarily because real wage growth for most employees has been non-existent for over a decade. It’s no surprise that many people choose not to participate in a qualified retirement plan. After all, if you’re living hand-to-mouth and have no excess disposable income, retirement saving isn’t your top priority. Since all the automatic IRA bills currently under consideration allow employees to opt-out of the program, it’s likely that many will do so since they need every dime of income to make ends meet," says Twibell.

While Ben Barzideh, a wealth advisor at Piershale Financial Group thinks auto-IRAs are a step in the right direction, it is not enough. "Maybe the government could offer a federal match toward the auto-IRA account on top of the employee’s contribution to motivate people below a certain income threshold, and maybe some additional tax incentives on top of that."

As of right now, no state has issued a legal and market analysis report to determine whether or not any of these programs may go forward, says Kate Crowther, government relations strategist at Ubiquity Retirement + Savings. "California and Connecticut are in the midst of their studies with report due by the end of the year and early 2016 respectively. The states that have the most potential for success are states such as Illinois, which have created a private-public partnership, along with mandating access to workplace savings."

Gary Plessl, a certified financial planner with Houser & Plessl Wealth Management Group applauds the states for taking action to help solve a fundamental problem in America, "The reality is that with federal government contribution limits to IRAs set at $5,500 a year and $6,500 if you’re over 50, the amount of money saved here will only put a small dent in a huge problem. The real benefit here could be that the action taken by these states would put pressure on the federal government to enable laws that make it easier for individuals to save for retirement and for small businesses to provide retirement savings plans for their employees," he says.

But says Ken Weber, president of Weber Asset Management, "Automatic savings of any type can be a godsend for millions of Americans. The auto-IRA concept ought to be adopted far and wide, the sooner, the better."

Over time, a well managed IRA could lead to a sizeable nest egg. Employers win too, as the fees to administer an IRA is negligible, says Nikki Turosky Smith, a certified financial planner. "Fees to administer a 401k can be significant and sometimes difficult for a small company to afford. The number of investment choices are virtually unlimited in an IRA, which could lead to better account performance when compared with a typical 401k," she says.

What’s key is that there must be easy to understand training for employees so they understand the consequences of having these accounts, says Bijan Golkar, a certified financial planner with FPC Investment Advisory, "Big companies have HR departments that can guide employees down the right path. For small companies, this is not a luxury they can afford. One should worry about an employee taking out some funds and having an unexpected tax bill the next year."

Says Turosky Smith, "This may not be the complete answer to the retirement crisis, but it’s a start."

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Comments
Anonymous
Anonymous   |     |   Comment #1
If workers are allowed to borrow on these auto-IRA accounts, just like the present 401k system, then the result would be little different. Too many people don't contribute enough, or borrow from their accounts to pay outstanding debt when they get in over their heads.
Anonymous
Anonymous   |     |   Comment #2
More socialist nonsense by those who want more control of: you and your money. How stupid are we. THE GOVERNMENT already FORCES each worker into a retirement program. It's called social security! Furthermore, individuals can add savings to a self or professionally managed IRA (regular or Roth). Or, heaven forbid, they can pay taxes on income and SAVE money in long-term CD's, gold, bank accounts, stocks, bonds, or under the darn mattress. There are innumerable ways to prepare for retirement BUT, no, the government wants to intrude further into your private life because they think you act like an idiot.

The solution is to let people fail. When your parents move in because they spent foolishly perhaps you will save for your golden years. Perhaps not. But the idea that the government must force people to save for retirement has ALREADY BEEN implemented via social security.

Government is totally out of control and this is just another way to funnel more money to "money managers" lusting after you wealth. Insurance companies and financial advisers absolutely love these socialist ideas and they actively promote them behind the scenes. This proposal is not about caring for an individual. It is the work of lobbyists who create fictionalized horror stories to scare up more business for themselves. There is NO RETIREMENT CRISIS. People will simply have to work longer, reduce their lifestyle expectations and move in with the kids or grand kids. That's the price of a leased car, expensive home, lavish vacation and other innumerable indulgences.
Anonymous
Anonymous   |     |   Comment #3
Why don't you move back to Oklahoma and relive the 30s!
Anonymous
Anonymous   |     |   Comment #9
I have absolutely no problem with the notion of social security. Implementation is another question altogether. You sound like a victim of the nonsense you hear everyday from people who do not care one wit about the poor, elderly or others in true need.
Anonymous
Anonymous   |     |   Comment #4
Social Security is great. It keeps you from tripping over the dead bodies on the sidewalk of the elderly who would starve to death without it.
Joelle Greig
Joelle Greig   |     |   Comment #12
Anonymous #2, So, privatizing social security by allowing Wall Street to INTRUDE into our private lives isn't the same thing? The government constantly needs to dip its greedy little fingers into our paid-for social security; it's that robbing from Peter to pay Paul effect. However, if Wall Street starts to do this, and then goes off the deep end with our money such as what happened to everyone's 401ks back in '08- '09, not a soul saw that money again. Please don't diss on the government so quickly; the private financial sectors IMO are once again performing egregious activities. For them, that slippery slope means absolutely nothing, because it's not their money they're playing around with. It's more like playing Monopoly...
Anonymous
Anonymous   |     |   Comment #13
I fully support SS and I never said otherwise. This article is about another government-forced intrusion into private lives. What if you want to use your money to invest in property, your business, stocks, bonds, a friends business venture? Sorry, you gotta do what we say you gotta do with your money. That's tyranny.

There is no social security fund. Your contributions were not saved; they were spent on retirees. Your payments will come from working folks, not some savings account. This is basic knowledge.

The government facilitates wall street speculation. Every smart person knows it. Banks are BIGGER than before they were "too big to fail". That's your government at work. Government could of and should of broken them into smaller competitive banking institutions AND taken banks out of the investment arena. Neither was done and now the situation is worse than ever. Banks have become hedge funds and the average citizen has no idea what that means. It means instability and trouble in an area affecting all of us. 
Anonymous
Anonymous   |     |   Comment #14
You fully support soc sec by having the funds used by wall street!...Got it.   Given the way everyone "always win" with the market, that is a sure winner.  The only reason why Soc Sec may be "short" is b/c the Disability part from the US is paid through it...Disability should be separately funded or....
Anonymous
Anonymous   |     |   Comment #5
The only way to be sure to increase the savings rate, especially by poor Americans, is to mandate that all Americans under the age of 70 must save 10% of their gross income. The money would be automatically deducted from one's wages (as are Social Security, Medicare and federal and state income taxes). The money would be invested in index funds (covering the world) for stocks, bonds, real estate and commodities. The money could not be touched until age 70 when it could be taken out as an annuity (or simply left there for later use). The monies would be owned by the individual (unlike Social Security payments). The monies collected would be tax deductible and taxable at time of withdrawal. To pay for this, all other retirement programs would be ended. (Monies in these accounts would continue but no additional funds could be invested.)
Anonymous
Anonymous   |     |   Comment #7
Another words, Wall Street determines whether one survives or dies.
Anonymous
Anonymous   |     |   Comment #11
You do not understand markets or, more importantly, the concept of individual freedom. Like so many in government you want people to do your bidding, thereby robbing them of free choice. Certainly, you do not understand the poor. For most, 10% would put them on the street corner, homeless. And, the poor guy who needs serious cash at 68 is out of luck though I'm sure you'll extend him/her a personal loan at 0% interest. 
KNOW-IT-ALL
KNOW-IT-ALL (anonymous)   |     |   Comment #6
A TRADITIONAL IRA IS THE WORST INVESTMENT EVER INVENTED.

SURE, YOU DEFER TAX WHILE YOU ARE WORKING.

BUT, WHEN YOU TURN 70 1/2 YOU MUST TAKE THE RMD AND THAT PUSHES ALL YOUR INCOME (PENSIONS, SOCIAL SECURITY, INTEREST FROM BANK ACCOUNTS, ETC.) INTO A HIGHER AND HIGHER INCOME TAX BRACKET--AND ITS ALL TAXED AS REGULAR EARNINGS.

I WISH I THOUGHT THIS OUT --BUT ITS 30 YEARS TOO LATE.

THE ROTH IRA IS A MUCH MUCH BETTER RETIREMENT SAVINGS DEVICE.

HOWEVER, SEVERAL KEY MEMBERS OF  CONGRESS WANT TO ENFORCE RMDs ON ROTH IRAs AS WELL-THEN THE SAME PROBLEM ARISES --AT LEAST ONLY THE GAIN IS TAXABLE--AND THAT WOULD BE PRO-RATED. UNLESS CONGRESS CHANGES THE TAX RULINGS ON ROTH IRAs --AND THEY WILL--ITS ANOTHER SOURCE OF TAX INCOME FOR THE GOVERNMENT.

THE BEST RETIREMENT SAVINGS PLAN IS SAVE YOU MONEY, PAY YOUR TAXES AS YOU GO, STAY AWAY FROM 401Ks, TRADITIONAL IRAs AND PERHAPS ROTH IRAs.

THEN WHEN YOU RETIRE--ITS ALL YOURS!!!
Anonymous
Anonymous   |     |   Comment #8
I agree wholeheartedly.  This happened to me with the 401K scenario -- Medicare insurance cost has doubled and I am paying a lot of tax.  I would not participate in a 401K plan if I had my time over again.
Anonymous
Anonymous   |     |   Comment #10
The BENEFIT of a 401K with an employer match is that you receive FREE MONEY upfront. Who, in their right mind, does not want free money? Based on available facts from plan managers, many forgo the match because they don't contribute in part or whole. If there is no match then it's nothing more than a deferred tax investment account, similar to an IRA. P.S. Don't forget management fees. 
Anonymous
Anonymous   |     |   Comment #15
Looking back over the past 30 years, I would NEVER go the 401K or IRA route again.
Anonymous
Anonymous   |     |   Comment #16
Depends upon the "investment" in the IRA/401K...I was very conservative from the get go (and still in that mode of operation) and never lost a penny.  Hogs get slaughtered and pigs get fat...as some say.
KNOW-IT-ALL
KNOW-IT-ALL (anonymous)   |     |   Comment #19
I NEVER LOST A CENT IN THE IRA/401K.  MY COMPANY PROVIDED A GENEROUS MATCH AND I INVESTED IT WISELY OVER THE 30 YEARS.

BUT THATS THE PROBLEM.  IT'S A LOT OF MONEY AND ALL TAXABLE AS EARNINGS AND HAS TO COME OUT NOW AS RMD AND AFFECTS THE TAXES ON ALL MY OTHER INCOME--AND THE NEW MEDICARE SURTAX FOR THE "WEALTHY" AND THE 3.8% NET INVESTMENT INCOME TAX AND ...

ALL THAT TAX DEFERRED CONTRIBUTIONS AND GAINS ARE SUBJECT TO A COMBINED 50% STATE AND FED TAX, ALTERNATE MINIMUM TAX AND MEDICARE SURCHARGES, 3.8% NET INVESTMENT TAX.  THATS THE BAD ENDING TO THE IRA/401K STORY. 
Anonymous
Anonymous   |     |   Comment #20
Sorry, your tax bracket does not evoke sympathy, especially when you knew in advance what the rules were.
Anonymous
Anonymous   |     |   Comment #21
Proper prior planning!  Knowing that RMDs kick in at 70 1/2, years before I kept taking money out of IRAs to just stay below the next tax rate AND to have that rainy day fund.  Now, RMDs (if Congress cooperates again this year) goes to charities and to me to just not trigger "too much" taxes.  It is all in the planning...sorry to read some planning came up short.  Have any taxes withheld in the IRA distributions in Dec. and thus no estimated or withheld taxes.
Anonymous
Anonymous   |     |   Comment #17
Did your 401K have a match?
Anonymous
Anonymous   |     |   Comment #18
It did but that was years ago.  I converted those funds in 2007 (note the year) to an IRA to go with my self-employed IRAs with "no match."  All in CDs
ChrisCD
ChrisCD   |     |   Comment #22
I'm not really sure why people are giving #2 so much grief.  We are already forced to contribute to social security.  Now you want the Gov't to force you to contribute more?  The Gov't needs to be involved less, not more. 
Anonymous
Anonymous   |     |   Comment #23
Somewhat surprising on a site dedicated to helping individuals make personal decisions about which savings instruments they should invest their money in. The funny posts are those that in effect say, "I have too much money coming in so I pay a lot of tax and that's really bad...to have so much money coming in." I recently spoke with someone complaining about a family member who paid...$600,000 in taxes last year. You read that right, 600K in taxes and the tears start flowing. I was speechless.