Auto-IRAs Automate Savings

Saving for retirement should be a snap. Yet one of the reasons the U.S. savings rate has been so dismal in recent years is that there are too many barriers to doing it easily.

You can do paperless direct deposits of Social Security and payroll checks. You can even pay your bills online. But setting up an automatic retirement savings plan can be an arduous hassle. And if you’re working, your employer may not even offer a savings or retirement plan. Some 78 million workers—half the American workforce—don’t have access to an employer-sponsored program.

Removing barriers to saving was an early goal of the Obama administration. Its first budget proposal in February recommended that employers who don’t offer their own retirement plans be required to enroll workers in a savings program­—a concept known as the automatic individual retirement account or auto-IRA.

While that program requires legislation from Congress, the administration moved on its own this month to cut some of the red tape on savings vehicles by early next year.

In his September 5 radio address, President Barack Obama announced new rules from the Treasury Department that will let you:

• Buy U.S. savings bonds directly from the government with your federal income tax refund. Next year, all you’ll have to do is check a box on your tax form and the bonds will be mailed directly to you. Starting in 2011, co-owners such as children and grandchildren can be added. More than 100 million Americans get tax refunds, averaging about $2,000 each.

• Be automatically enrolled in a retirement savings plan at your workplace (with the option to opt out). Most companies that offer these plans do not currently practice automatic enrollment, often because of the paperwork involved. The IRS will create preapproved language so that companies can quickly add this option.

Automatic enrollment will also be available for the first time for companies offering SIMPLE IRAs (savings incentive match plan for employees), a retirement plan with relatively little paperwork that’s like a boiled-down 401(k) plan.

• Increase your contributions automatically. This new rule lets workers boost their retirement contributions every year, for example by a percentage of their pay raises. They wouldn’t have to decide whether to invest more money or how much, because the increase would be preset.

• Invest your unused leave benefits. If you leave a company and are owed vacation time, the new rules would let your employer convert that benefit into cash and invest it in your 401(k) or other retirement plan.

While most of these changes are the result of administrative rules and don’t require legislation, further increasing the number of people participating in retirement plans will require legislation by Congress.