Retirement group testifies on automatic IRA legislation

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On Thursday, November 8, 2007, Mark Iwry and David C. John, representing The Retirement Security Project (RSP), testified before the House Education and Labor Committee's Subcommittee on Health, Employment, Labor & Pensions, in support of the Automatic IRA proposal to dramatically expand retirement saving.

The Automatic IRA Act of 2007 (H.R. 2167), introduced in the House by Reps. Richard E. Neal (D-MA) and Phil English (R-PA), makes it easy for employees not covered by a 401(k) or other employer plan to save in IRAs through automatic payroll deposit. The bill is based on a proposal developed jointly by Iwry, a Nonresident Senior Fellow at the Brookings Institution, and John, a Senior Research Fellow at the Heritage Foundation, as Principals of the non-profit Retirement Security Project.

The hearing comes a day after presidential candidate Senator Barack Obama and several weeks after Senator Hillary Rodham Clinton both proposed to improve retirement saving through programs substantially similar to the Automatic IRA.

"The Automatic IRA is a disarmingly simple concept," said Iwry. "It combines three building blocks from our current pension system -- saving through 401(k)-type payroll deposits; automatic enrollment; and IRAs -- to enable tens of millions of American workers to build portable retirement security even if they have no employer plan. This strategy harnesses the power of inertia to promote saving for families and the nation."

"A key part of the Automatic IRA is that employers will not have to comply with burdensome regulations or hire a plan administrator," said John. "Employers will also not be required, or even allowed, to match employee contributions. It is simply a system that allows workers to save their own money for retirement."

Nearly half of American workers -- an estimated 75 million -- currently have no employer-sponsored saving plan. The Automatic IRA bill (identical companion legislation was introduced as S. 1141 by Senators Jeff Bingaman (D-NM) and Gordon H. Smith (R-OR)) would extend easy-to-use payroll-based saving opportunities to millions of employees who have no employer plan while offering similar saving options for the self-employed. It also offers continuity and portability of savings when people change jobs.

Automatic IRAs are standard IRA accounts like those currently offered by financial institutions. They are funded through payroll deductions and offer powerful automatic 401(k)-like features such as automatic enrollment and automatic investment.

Under the proposal, employers with more than ten employees that have been in business for at least two years would enable employees to save their own money in an IRA by using the employer's payroll system. The Automatic IRA allows employers to facilitate employee saving without having to sponsor an ERISA-regulated retirement plan and without making any contributions. Firms offering an Automatic IRA would receive a temporary tax credit and would have no responsibility to select investments or IRA providers, or to open IRAs.

What could the automatic IRA mean to an average individual? The Retirement Security Project estimates that a 20 year-old auto mechanic saving 3 percent of his or her income could save as much as $324,000 for retirement.

The Automatic IRA builds on the success of automatic enrollment in 401(k)s. Recent surveys have shown significant gains in the use of automatic enrollment since the passage of the Pension Protection Act of 2006, which helped smooth the way for automatic enrollment in 401(k) plans by clarifying laws for employers. A survey by the Wells Fargo group found 44 percent of companies surveyed reported using automatic 401(k)s, while a Hewitt Associates survey found that nearly 30 percent of companies offer automatic escalation in conjunction with automatic enrollment, with more than 40 percent of those escalating employees to rates between 8 and 15 percent.

According to Bill Gale, Director of the Retirement Security Project: "The bipartisan PPA has helped launch an automatic revolution, changing the way that American workers save for retirement in 401(k) plans. The Automatic IRA leverages the positive impact of automatic enrollment for the millions of workers who don't have access to employer pensions. The fact that support for these policy measures is bipartisan and widespread and that the issues are on the radar screen of Members of Congress and Presidential candidates is a testament to the fundamental common sense of making saving automatic and easy."

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