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.
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."