Article published on February 1, 2010
By Mariana Lemann
Although President Obama did not outline any specific plans for reforming the retirement savings system during his State of the Union address last week, the industry has been vocal with its ideas and reactions to the administration’s suggested areas of change.
One such area being examined by the administration’s Middle Class Task Force would seek ways to extend retirement savings plans to 78 million citizens, or half of the workforce, who don’t have an employer-based retirement plan. One of the main ideas of the task force, formed in January 2009 and led by Vice President Joe Biden, is to establish an automatic individual retirement account (IRA).
The proposal would allow an employer that does not currently offer retirement plans to enroll its employees in direct-deposit IRAs, from which employees could opt out if they chose to.
“It is a simple proposition, but it is a big deal,” Vice President Biden said in remarks to the task force on Jan. 25.
The contributions would be voluntary and matched by the Savers Tax Credit for eligible families. The Savers Tax Credit is a non-refundable tax credit available to lower-income individuals and households that contribute to qualified retirement savings plans, including traditional and Roth IRAs. In addition, the administration has proposed the expansion and simplification of the Saver’s Credit to match 50% of the first $1,000 of contributions by families earning up to $65,000 and providing a partial credit to families earning up to $85,000.
The Investment Company Institute (ICI), a lobbying group for the mutual fund industry, along with some financial services companies active in the retirement savings marketplace, says that it supports the administration’s efforts to boost the country’s retirement savings system but also feels it is still early to envision how such a system would be put into effect.
“ICI stands ready to continue working with the Administration and Congress to explore new ways to expand retirement savings opportunities to more Americans — concepts like automatic enrollment in a payroll IRA,” writes Rachel McTague, a spokesperson for the ICI, in an e-mail in response to questions.
“We have a shared national goal of increasing retirement savings opportunities for all Americans and we applaud the President’s attention to this important issue.”
Fidelity Investments, the largest provider of retirement plans, supports the president's goals of expanding coverage and retirement security, Jenny Engle, spokesperson for the firm, writes in an e-mail response to questions.
“For workers without a workplace plan, we believe saving for retirement in IRAs is important. Fidelity will actively work with policymakers to share our expertise and help ensure that any new proposals meet the goals of expanding coverage and benefit security in ways that are simple and cost-effective for investors.”
Details of how the system would work need to be fleshed out to allay concerns about the viability of the system.
The idea behind offering automatic IRAs for all employers is a good one in theory, but it is too early to speculate how the system would be put in place, says Tom Foster, a VP and national spokesman for The Hartford's retirement plans group. “The Hartford would be an advocate of anything that allows people to participate and save for retirement,” he says.
One of the emerging concerns with the proposal is how economically attractive mandatory auto IRAs would be for service providers and asset managers.
“The challenge for an investment company is the cost of what will initially be millions of very small balances,” says David Wray, president of the Profit Sharing Council of America (PSCA). “The question for providers will be how can they manage the financial expense of supporting the system until account balances get large enough to be profitable.”
That concern is shared by Prudential, says Jamie Kalamarides, senior VP of retirement solutions for Prudential Retirement. “Prudential supports the auto IRA proposal, but we believe there is an opportunity to do more,” he says. “A one-size-fits-all approach with an auto IRA may not be the best solution.” And one of the reasons is that it may not be economically interesting enough for some providers, he says.
What Prudential has been pushing in the last nine months is multiple small employer plans that would act as a complementary alternative to the auto IRA. “These plans would allow unrelated employers to get together and pull their purchasing power through a provider… and the small employers would adopt a plan that would have a model plan design, written by the IRS, and they would be able to give very good basic retirement plan coverage at an affordable price with simple administration,” he says. “But we need legislation,” he says, in order for that system to be put in place.
Prudential may also need patience.
“We don’t anticipate that there will be anything this year,” PSCA’s Wray says. “Significant discussions about retirement plan changes will happen next year.”
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