Auto-IRAs Automate Savings

The big idea: auto-IRA

In February, Obama said he wanted a system in which workers who don’t have access to another retirement plan to be “automatically enrolled in some form of savings vehicle when they go to work—making it easy for them to save.”

For years, Congress has been kicking around auto-IRA proposals that would do just that. The sponsors of the auto-IRA bill in the previous Congress, Sen. Jeff Bingaman, D-N.M., and Rep. Rich Neal, D-Mass., plan to introduce it again in the current Congress, which is dealing this fall with a contentious debate over health care reform and must-pass budget bills.

Auto-IRAs would let tens of millions of workers whose employers do not offer retirement savings plans automatically contribute to IRAs through payroll deductions. It would fill the gap between expensive and complicated 401(k) plans and the myriad plans open to smaller business that just haven’t caught on.

“I am pleased that President Obama included my auto-IRA bill in his budget proposal to Congress,” Bingaman said Monday. “This common-sense approach would ensure that all Americans have the opportunity to save for retirement through workplace contributions.”

The ultimate goal is to fix the overall retirement system, said Hans Reimer, campaign manager for AARP on the auto-IRA. “This is a chance to help younger and future members, and there’s no better time to do this than now,” he said.

How auto-IRA would work

Under the bill introduced in the previous Congress, investment options would be set by a government-appointed board. Unless you opted out of the plan entirely or allocated your contributions yourself, a default portfolio would be set up for you.

Safety would be the theme of the default option. Investments would include inflation-indexed Treasury or U.S. savings bonds, money-market funds or stable-value bond funds. The administration is also considering a new type of savings vehicle called an R bond that would be available directly from the Treasury and only available to retirement plans.

The principle behind the autopilot mode comes from behavioral economics, a school of thought that combines psychology with economic decision making. When forced to make financial choices, research has shown, we often make bad ones and end up in investments that are too risky or too cautious, or totally inadequate to fund our retirement needs. We often choose to eschew retirement saving altogether. To offset those hard-wired tendencies, a key provision in the auto-IRA is a starter account for small deposits that would include a stable-value income vehicle.

“The starter account would be very low risk,” said David John, a senior fellow at the Heritage Foundation, who is one of the authors of the bill. “We’d keep costs down in indexed or low-fee options.”