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Most Small Employers Face Low Costs to Implement Automatic IRAs

One of the concerns about an Automatic IRA program for all employees who do not have access to an employer-provided retirement plan is the potential costs to employers. This report finds that most employers would likely face low costs to implement a system of automatic individual retirement accounts (IRAs).  Automatic IRAs can be designed to integrate into existing business payroll systems in a way that will minimize an employer's responsibilities. Most small employers will have only small incremental costs to modify their payroll processing systems in order to facilitate enrollment in Automatic IRAs and withholding of Automatic IRA contributions. The widespread adoption of automated payroll systems, including within the small business sector, and the ability of those system providers to build the Automatic IRA into their services, will make this new employee benefit relatively simple to implement.

Key findings include the following:

  • The more automated the employer's payroll processing, the easier Automatic IRAs will be to implement. The key will be for payroll software companies, payroll service providers, and Professional Employer Organizations (PEOs) to integrate the Automatic IRA into their systems.
  • According to market research, 97 percent of employers with 10 or more employees use automated systems and do not process payroll manually. These employers would have far fewer responsibilities with respect to Automatic IRAs. 
  • Following enactment of Automatic IRAs, payroll software companies, payroll service providers, and PEOs would have strong market incentives to incorporate the Automatic IRA requirements in their services to small employers.
  • A tiny fraction of employers with more than 10 employees (as low as 3 percent) use manual payroll processing. A small employer that prepares their payroll manually will also implement their Automatic IRA program manually. The use of manual payroll processing tends to be directly correlated to the size of the employer, so the larger the employer, the less likely the employer will use manual payroll processing. As a result, the smallest employers--those most likely to process their payroll manually--would not be required to offer Automatic IRAs, because the Automatic IRA proposal would not apply to employers with less than 10 employees.
  • The incremental costs to most small businesses related to the implementation of Automatic IRAs are likely to be quite low. Further, the Automatic IRA proposal offers a tax credit ($250 per year for two years) to small employers to help them offset the costs of implementation.

This study was commissioned by AARP and performed by Optimal Benefit Strategies, LLC. For further information, contact Dave Schneier of AARP Media Relations at 202-434-2561. (9 pages)