Can the Government Make You Get an IRA?
Probably, but that doesn't mean Obama's proposals will help workers.
The State of the Union address didn't deliver many surprises. It was broadly populist in tone, with promises to rein in a bloated budget through (token) spending freezes and deliver relief to a middle class that's grown disillusioned with an unemployment rate of 10 percent and a still-moribund real estate market.
The administration's main olive branch is a package of tax cuts, rebates and policies created by the Joe Biden-led Middle Class Task Force. It's a grab bag of feel-goodies like student loan forgiveness and a larger tax credit for child care. Obama alluded to a few of these in the State of the Union; more detail had already been given at another speech two days earlier.
Several of the proposals touched on last night and outlined in more detail by the Middle Class Task Force are part of a push to improve and standardize American retirement planning. This is where Obama could do the most good—but whether average workers or financial service firms and insurance companies will be the chief beneficiaries remains to be seen.
Make no mistake, something needs to be done about the state of retirement planning in this country. Since 401(k)s have largely replaced traditional pensions, the financial state of our collective golden years has become precarious. First, not all companies offer retirement plans. Those that do often make them available only to full-time or salaried employees. Workers further down the income ladder are left out of the loop by design or by their own decision; if they can barely make ends meet, they're not going to voluntarily sock away a chunk of their paycheck. There's also the fact that retirement benefit plans are complicated, offering a myriad of choices that sometimes freezes would-be participants into inertia.
According to Center for Retirement Research at Boston College, 51 percent of households won't be able to maintain their standard of living after retirement. Even before the financial crisis struck, that number was at a worrisome 43 percent.
The President's plan is to make retirement contributions opt-out: the default will be for employers to enroll their employees in Automatic IRA, the cornerstone of the Retirement Security Project developed by David John of the Heritage Foundation along with Mark Iwry, a former Brookings Institution scholar who decamped to the Treasury Department last year. All but companies with 10 or fewer employees would be required to participate, which John estimates will increase the number of Americans with retirement-plan access to 89 percent, up from roughly 50 percent today.
The idea of more-or-less requiring Americans to do the right thing isn't a new one, and it's no surprise to see it coming from this administration. Cass Sunstein, Obama's appointee to head the Office of Information and Regulatory Affairs, gained notoriety for his co-authorship of Nudge. The book uses the psychology of human behavior to argue that lawmakers have an obligation to craft policies that shepherd citizens towards a desired outcome. Retirement saving is one topic the authors tackle specifically, pointing out that when private employers offer incentives for saving and take steps to make the process simpler, participation increases.
Retirement Security Project developers envision private-sector administration of auto-IRA, with a small number—perhaps as few as three—target-date investment options offered, based on index funds to keep both risk and overhead low. Progressive groups want to see a publicly-managed option offered, as well, to keep what could be substantial fees down by increasing the amount of competition. Others have kicked around the idea of caps on fees plan administrators could charge.
Initially, a worker just starting out would have his or her money invested in an "accumulation account" until it reached $5,000. The Project calls for the creation of a special type of bond, called an R-bond, to house these embryonic nest eggs. Upon hitting the $5,000 threshold, the money would roll over into a target date fund unless the worker specified otherwise. If the amount never reached that $5,000 threshold—say, if the person left the workforce to start a family and never returned—the money would be treated like any other inactive IRA account. (In other words, the government couldn't claim those funds through escheatment the way it does with unclaimed tax refunds.)
Martha C. White is a freelance writer in New York.