The Automatic IRA: Coming to a Small Business Near You?

Automatic IRA EnrollmentIf you look at President Obama’s 2013 budget (which failed to pass in both houses: 0-414 & 0-99) there is one thing in it that Democrats and at least a few Republicans appear to support: the Automatic IRA (or Auto IRA).

Like any piece of proposed legislation there are many iterations of the idea before it become law. So far, the Automatic IRA isn’t law, but this is the general idea:

  • applies to small businesses (10+ employees) at least 2 years old
  • would require the small business owner to start a company IRA plan
  • would require the small business owner to automatically enroll employees in the IRA
  • employees could opt out

If this sounds slightly familiar to you, it’s because we already have an automatic 401K law. This law, passed in 2006, allows companies to automatically enroll their employees in the company sponsored 401K.

The Automatic IRA would be different not only because it’s an IRA vs a 401K, but because it isn’t only about automating the contribution, it’s about requiring/creating something that isn’t there to begin with.

Companies that currently have no retirement plan in place (around half the U.S. workforce, by some reports) would be required to start offering one.

The automatic 401K enrollment had bipartisan support as well, but it hasn’t done so well in changing the retirement savings landscape. Some stats are showing more harm than good from the change.

At first glance, I think the Automatic IRA could have different, far more positive results. But, the we’re-smarter-than-you government intervention usually does come with unintended consequences, so who knows what would come of this.

One obvious consequence is that you are putting a burden on small business to research and implement IRA plans. This is nothing to scoff at. As a small business owner who implemented his own solo 401K retirement plan, I can attest to the cost of the process. Proponents argue that most legislation has involved credits to offset costs. Opponents ask “what’s there to offset the loss of liberty?”

Thankfully, anyone can already open up their own Automatic IRA. If your employer doesn’t offer a retirement plan, create your own for free at any of the discount online brokers. Talk to your employer about creating a direct deposit into the account each month, or implement a simple automatic withdrawal from your checking account.

I honestly hadn’t heard much about this proposal (which has apparently been on the table for at least 5 years) until I read an article from SmartMoney.com about the candidates’ affects on retirement.

What do you think of the Automatic IRA? Nanny-state overreach that will never pass into law, or good government policy that’s sure to help millions?

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Last Edited: June 5, 2012 @ 2:15 pm
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. I am in favor of automatic IRAs and an incentive to use it.  Once people see how easy it is , they will use it.

  2. The purpose of parenting is to rear children to become independent, productive members of society.  The purpose of government is not to be a helicopter parent.

  3. Christie McGuire Struck says:

    The purpose of parenting is to rear children to become independent, productive members of society. The purpose of government is not to be a helicopter parent. At some point, we have to let people be grown-ups. That does involve learning from one’s mistakes, painful though that may be.

  4. Christie McGuire Struck says:

    The purpose of parenting is to rear children to become independent, productive members of society. The purpose of government is not to be a helicopter parent. At some point, we have to let people be grown-ups. That does involve learning from one’s mistakes, painful though that may be.

  5. There are plenty of good things that the government could mandate that we do, but I’m hesitant to ever implement policies that mean more government controls and limits.  We’re currently in a climate lwhere small business needs help to stay afloat, much less giving them another cost associated with doing business.  I’m all for people starting IRAs, but I’m not sure mandating that small business do it is the answer.

  6. There are plenty of good things that the government could mandate that we do, but I’m hesitant to ever implement policies that mean more government controls and limits.  We’re currently in a climate lwhere small business needs help to stay afloat, much less giving them another cost associated with doing business.  I’m all for people starting IRAs, but I’m not sure mandating that small business do it is the answer.

  7. PT Money says:

    I agree 100%. But I’d just like to point out that not saving for retirement is a mistake you can’t afford, as there is no second chance once you’ve learned your lesson. At that point you are old and broke. I think where some in the small government crowd tend to agree with the auto ira law is that it would possibly lessen our reliance on ss and move us away from reliance on our biggest entitlement program. “Possibly” is the key.

  8. PT Money says:

    I agree 100%. But I’d just like to point out that not saving for retirement is a mistake you can’t afford, as there is no second chance once you’ve learned your lesson. At that point you are old and broke. I think where some in the small government crowd tend to agree with the auto ira law is that it would possibly lessen our reliance on ss and move us away from reliance on our biggest entitlement program. “Possibly” is the key.

  9. GlenCraig says:

    I’m all for more people implementing IRAs as well as making them automatic.  But requiring a small business owner to give the plans puts an undue burden on the business owner.  There are enough small business rules to keep up with as it is.  Unless the government can find an easy, cost-effective way for a small business owner to keep the plan going then I can’t be for it.
     
    As you say there are always unintended consequences.  So instead of 10+ employees, small business owners will have an incentive to keep hiring under that amount or else they will have to incur a new cost.  This doesn’t encourage small business growth.

  10. GlenCraig says:

    I’m all for more people implementing IRAs as well as making them automatic.  But requiring a small business owner to give the plans puts an undue burden on the business owner.  There are enough small business rules to keep up with as it is.  Unless the government can find an easy, cost-effective way for a small business owner to keep the plan going then I can’t be for it.
     
    As you say there are always unintended consequences.  So instead of 10+ employees, small business owners will have an incentive to keep hiring under that amount or else they will have to incur a new cost.  This doesn’t encourage small business growth.

  11. GlenCraig says:

    I’m all for more people implementing IRAs as well as making them automatic.  But requiring a small business owner to give the plans puts an undue burden on the business owner.  There are enough small business rules to keep up with as it is.  Unless the government can find an easy, cost-effective way for a small business owner to keep the plan going then I can’t be for it.
     
    As you say there are always unintended consequences.  So instead of 10+ employees, small business owners will have an incentive to keep hiring under that amount or else they will have to incur a new cost.  This doesn’t encourage small business growth.

  12. Glen bring up a great point – many small companies are now avoiding hiring new employees due to the new health care requirements. Instead of hiring full-time help, they hire part time employees or contractors, both of which come with little to no benefits. There are always loopholes to exploit, and in some cases, it makes a lot of financial sense to do so.
     
    Regarding implementing IRAs – I think they are often easier and less expensive to implement than 401k plans, however, this is based on what I have seen when researching Solo 401k plans for my own business. (in my case, I went with Vanguard, because it was very inexpensive to set up and maintain compared to plans run by other companies).
     
    In principle, I like the idea, but I would have to see the final implementation before passing final judgment.

  13. Glen bring up a great point – many small companies are now avoiding hiring new employees due to the new health care requirements. Instead of hiring full-time help, they hire part time employees or contractors, both of which come with little to no benefits. There are always loopholes to exploit, and in some cases, it makes a lot of financial sense to do so.
     
    Regarding implementing IRAs – I think they are often easier and less expensive to implement than 401k plans, however, this is based on what I have seen when researching Solo 401k plans for my own business. (in my case, I went with Vanguard, because it was very inexpensive to set up and maintain compared to plans run by other companies).
     
    In principle, I like the idea, but I would have to see the final implementation before passing final judgment.