Auto IRAs Could Jump Start Worker Savings: 48 Million Americans Could Benefit From Auto Enrollment Retirement Programs

AARP Advocates Workplace IRAs as Additional Savings Option

Source: AARP Press Center |  | July 10, 2007

As millions of Americans prepare for retirement in five, 10 or 20 years the same questions arise, "How much do I need to save, and how do I do it?" An AARP-commissioned report found that automatic enrollment in employment-based Individual Retirement Account (IRA) programs would be a powerful vehicle to help as many as 48 million workers in this country generate retirement savings.

A recent report on Auto IRA predicted that 48 million workers - nearly two-thirds of the 75 million working Americans without current access to employer-sponsored retirement plans - could gain from such a program.

"Most Americans battle with the desire to spend but the necessity to save," said Tom Nelson, Chief Operating Office at AARP. "Automatic enrollment in an IRA would encourage saving and simplify the decision making process of planning and saving for retirement."

The AARP-commissioned study by Optimal Benefit Strategies, LLC, projects that a $l,000 annual contribution to an Auto IRA, at a modest four percent annual return, would yield $3l,000 of savings after 20 years and $58,300 of savings after 30 years. At higher rates of return, the balances would be even more dramatic, the study noted.

The study added that analyses have already shown that automatic enrollment 40l(k) plans increase employee savings participation rates "quite dramatically." Coming at a time when Americans have a negative savings rate, Nelson noted that, "studies such as this should give a new momentum and renewed focus on bipartisan, bicameral legislation already introduced in Congress to clear the way for workplace Auto IRAs."

Automatic IRA legislation has been introduced in the Senate by Senators Jeff Bingaman (D-NM) and Gordon Smith (R-OR). Companion legislation has been introduced in the House by Representatives Richard Neal (D-MA) and Phil English (R-PA). AARP is supporting the two bills.

Under the Automatic IRA, employers with more than 10 employees, who have been in business for at least two years, and who do not currently offer a retirement plan for their employees, would facilitate direct-deposit payroll deductions to an IRA at a financial institution. The employer would not contribute to such an account, but would merely act as a conduit. The employer would also receive a temporary tax credit to offset administrative costs. The employee would benefit from a simple savings mechanism, and all contributions would receive tax favored treatment.

Employees who work for small employers are less likely than other employees to have access to employer-sponsored retirement plans, the AARP report stated. Only 44 percent of employees working for employers with less than 100 employees are provided access to an employer-sponsored plan.

"Millions of hard-working Americans deserve a convenient cost-effective opportunity to begin a regular retirement savings program at their place of work," Nelson added. Currently, only about 50 percent of the workforce participates in, or has access to, an employer-sponsored retirement plan.

The full report can be viewed on AARP.org, http://www.aarp.org/research/financial/ira/auto_ira.html.

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