Tuesday, March 3rd, 2015

The Obameter

Require automatic enrollment in IRA plans

Require employers who do not offer retirement plans to offer their workers access to automatic IRAs and contribute via payroll deduction.


Updates

Obama again pushes for IRA automatic enrollment

President Barack Obama harped on a vintage idea in announcing the focus of his 2015 State of the Union address: auto-enrolling workers whose companies do not offer 401(k) retirement plans into Individual Retirement Accounts.

Obama wants employers without a retirement plan and employing more than 10 people to automatically sign up their workers in an Individual Retirement Account, or IRA. Sometimes businesses find it cost-prohibitive to offer retirement plans on a companywide basis, as well as providing a match to employee contributions.

Instead of opting into a savings plan under current law, workers would be able to opt out of having their own retirement account. The White House has cited research that the automatic plan would increase participation and contributions.

IRA contributions are generally tax-free, like 401(k) contributions, though there is no possibility of an employer match, which 401(k) plans can offer.

In the 2014 State of the Union address, Obama pledged to issue an executive order regarding the creation of "myRA" savings bonds to help Americans save for retirement. With "myRAs," a person can open an account with as little as $25 and contribute $5 with each paycheck. In general, IRAs require minimum deposits that some low-wage workers cannot meet.

The White House considers the 2015 push for automatic IRA enrollment a "complement" to this idea.

Whether Congress will go along with his retirement proposals after years of lukewarm reception is another story.

This promise remains In the Works.

Sources:

Obama's 2015 State of the Union address and supplemental fact sheet from White House press office

Obama's 'myRA' plan means progress on IRA enrollment

President Barack Obama's State of the Union address brought new life to an old promise about retirement savings for workers.

"Today, most workers don't have a pension," Obama said in his address on Jan. 28, 2014. "A Social Security check often isn't enough on its own. That's why tomorrow I will direct the Treasury to create a new way for working Americans to start their own retirement savings: myRA. It's a new savings bond that encourages folks to build a nest egg."

Obama has not yet been able to pass legislation requiring automatic enrollment in Individual Retirement Accounts, called IRAs, one of his 2008 campaign promises. Due to lack of progress, we rated it Promise Broken in 2012. However, his new plan might help him make progress on the substance of his pledge.

Called "My Retirement Account," or myRA, the program offers new retirement savings accounts for individuals looking for a simple way to start saving, according to an announcement from the U.S. Treasury Department. Individuals can open an account with as little as $25 and contribute $5 or more every payday. Those amounts are important, because traditional IRAs often have required minimum deposits that are beyond the reach of low-wage workers.

In a factsheet on the new plan, the White House noted that Obama does not need congressional approval to launch myRA because he's using an executive order. That order directs the creation of a type of government-backed bond that would earn a low rate of interest and come with a government guarantee.

The product will be offered via a familiar Roth IRA account, which means holders contribute money after income taxes are paid and any investment gains and withdrawals are tax-free once they reach retirement.

To be clear, this plan stops short of requiring automatic enrollment in IRAs. The White House said the accounts will be offered through an initial pilot program for employers who choose to participate. Still, this type of plan could dramatically expand access to retirement accounts. Based on this progress, we're changing our rating from Promise Broken and moving the rating back to In the Works.   

Sources:

President Barack Obama, State of the Union address, Jan. 28, 2014

New York Magazine, "Did President Obama's 'MyRA' Proposal Just Solve Two Huge Problems With Retirement Saving?" Jan. 29, 2014

Wall Street Journal, "Obama Signs Order for Retirement Accounts: New Investment Vehicle, called 'myRA,' Aims to Help Workers Save With the Tax Advantages of a Roth IRA," Jan. 29, 2014

U.S. Treasury Department, "myRA: A Simple, Safe, Affordable, Retirement Savings Account," Jan. 29, 2014

White House, "Fact Sheet: Opportunity for All: Securing a Dignified Retirement for All Americans," Jan. 29, 2014

Proposal hasn't fully reemerged after being overshadowed by health care debate

During the 2008 presidential campaign, Barack Obama promised to require employers who do not offer retirement plans to offer their workers access to automatic individual retirement accounts -- or IRAs -- with contributions via payroll deduction.

Here's the underlying idea: In order to encourage people to save for their retirement, the proposal would require that companies (other than the smallest firms) that don't offer other retirement plans such as 401(k)s to offer IRAs, with workers able to opt out if they wish.

Like a related promise on automatic 401(k) enrollment, the IRA proposal made it into Obama's 2010 budget outline. But it hasn't moved much further.

David John, a retirement-security specialist at the conservative Heritage Foundation, was one of the originators of the idea, which attracted bipartisan support. He said that the effort got sidetracked in part because congressional aides who were involved in it became deeply enmeshed in the health care debate. "Health care sucked out all the oxygen,” John said.

There are still some bills in Congress that would implement something along the lines of what Obama proposed. For instance, September 2011, Sen. Jeff Bingaman, D-N.M., offered the Automatic IRA Act of 2011. But it has not advanced to a hearing and has only secured one co-sponsor so far, Sen. John Kerry, D-Mass.

John said that Rep. Richard Neal, D-Mass., is expected to offer a House version soon.

The Obama Administration has done one thing that sounds similar to this promise, but it's actually different. The administration is issuing rules to help interested employers automatically enroll employees in a retirement-saving account called a SIMPLE-IRA, with employees able to opt out. But SIMPLE-IRAs are not the standard IRAs referred to in this promise -- they are a variety of saving mechanism established during the Clinton Administration as a low-cost variant of the 401(k). They require an employer contribution, and as a result, they have never become widespread.

It's possible that this issue will gain traction again, though its chances of advancing in a polarized Congress during a presidential-election year do not seem high. If it does, we'll change our rating. But for now, we'll rate it a Promise Broken.

Sources:

White House, "Retirement Security for American Families" (fact sheet), accessed Feb. 9, 2012

E-mail interview with David John, retirement-security specialist at the Heritage Foundation, Feb. 7, 2012

IRA auto-enrollment in the budget outline

President Barack Obama has been talking about automatic enrollment for retirement plans for years as a "common-sense, practical solution" to increase savings.

To explain this promise, we should probably start with Obama's proposal for automatic enrollment in 401(k) plans.

Let's say you've just been hired at the widget factory, and on the first day, the human resources person tells you that if you want to, you can enroll in the company's 401(k) plan to save for retirement. Economists have concluded that about 20 percent of low-wage workers will sign up for the plan under this scenario.

But let's say the widget factory changes its policy. Now, the human resources person tells you that you're automatically enrolled in the program, but if you don't want to be in it, you can fill out paperwork and opt out. Under this scenario, the percentage of workers with 401(k) plans increases to about 80 percent.

One of the benefits of a 401(k) is that the contributions are not taxed. Another is that employers can put money into the accounts, and usually this is done on a matching basis. If an employee contributed 15 percent of his or her earnings for retirement, for example, the employer might match the first 3 percent. The national average for a 401(k) matches in 2007 was 3.2 percent, according to the Profit Sharing/401(k) Council of America.

Not all companies offer 401(k) plans, however. For those companies, Obama would require that they enroll their employees in Individual Retirement Accounts with an automatic payroll deduction. Generally speaking, IRA contributions are also tax-free, though there is no possibility of an employer match in an IRA.

Obama says the automatic enrollment will make it easier for workers to save, and he wants to make sure to include workers who aren't eligible for 401(k)s.

The proposal made it into Obama's 2010 budget outline, but it will need approval from Congress. So we rate this promise In the Works.

Sources:

Office of Budget and Management, Budget Documents for Fiscal Year 2010 , Feb. 26, 2009

Brookings Institution, Launch of the Hamilton Project , April 5, 2006

The Heritage Foundation, Making savings the default option , Sept. 4, 2008

Profit Sharing/401(k) Council of America, 51st Annual Survey of Profit Sharing and 401(k) Plans , Sept. 25, 2008