Update on Automatic Enrollment IRA Initiative

Last May we discussed the Required Automatic Enrollment in IRAs Treasury Proposal that would require, effective January 1, 2012, "Employers in business for at least two years that have 10 or more employees would be required to offer an automatic IRA option to employees on a payroll-deduction basis, under which regular payroll-deduction contributions would be made to an IRA."

February 2010 pension legislative outlook – Administration and Congressional initiatives discusses President Obama's middle-class initiatives and raises some questions on the details of the automatic workplace IRA initiative:

Below is the description of the automatic workplace IRA proposal provided in the fact sheet released by the White House on January 25:

The Obama-Biden Administration will promote the establishment of a system of automatic IRAs in the workplace by requiring employers who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA unless the employee opts out. The contributions will be voluntary and matched by the Savers Tax Credit for eligible families. The Administration is also streamlining the process for employers to automatically enroll workers in 401(k) plans, which has been shown to boost participation, especially for low- and middle-income workers.

How will this affect larger employers that already sponsor one or more retirement plans? One would expect that, generally, large employers who maintain a retirement plan will be exempt. However, the devil is in the details. For example: What about a company that covers most employees but excludes one division – would an automatic workplace IRA have to be set up for that division? What about a company that excludes part-time or temporary employees? What about a company that makes employees wait one year to participate?

There are, as yet, no official answers to these questions, and they may be an element of the debate when this proposal is taken up by Congress. A mandate to provide excluded or part-time employees with an automatic workplace IRA may create an administrative burden for some employers who currently maintain broad-based retirement plans. How onerous that burden will be also remains to be seen. Basically, we need more detail before the effect of this proposal on larger employers can be evaluated.

Here is the language from the retirement security section of the Fact Sheet: Supporting Middle Class Families:

Establishing Automatic IRAs. Currently, 78 million working Americans—roughly half the workforce—lack employer-based retirement plans. Fewer than 60 percent of working heads of families were eligible to participate in any type of job-related pension or retirement plan in 2007. The Obama-Biden Administration will promote the establishment of a system of automatic IRAs in the workplace by requiring employers who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA unless the employee opts out. The contributions will be voluntary and matched by the Savers Tax Credit for eligible families. The Administration is also streamlining the process for employers to automatically enroll workers in 401(k) plans, which has been shown to boost participation, especially for low- and middle-income workers. New tax credits would help pay employer administrative costs and the smallest firms would be exempt.

Simplifying and Expanding the Saver's Credit. The struggle to save enough to ensure a secure retirement became particularly pronounced in the wake of the recent financial crisis, which delivered a major hit to the savings on which workers rely for their retirement security. The Administration proposes to help working families save for retirement by expanding and simplifying the Saver's Credit to match 50 percent 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 Administration will also make this tax credit refundable to ensure that millions of additional middle-income families can take advantage of it even though they have no income tax liability.

Updating 401(k) Regulations to Improve Transparency and Reliability. A majority of American workers rely on 401(k)-style plans to finance their retirements, making it critical that the 401(k) system be safe, transparent, and well-regulated. Even workers who save significant amounts may see their returns eaten away by fees and expenses. We need to do more to give families better choices to reach a secure retirement. The Administration is:

• Improving the transparency of 401(k) fees to help workers and plan sponsors make sure they are getting investment, record-keeping, and other services at a fair price.

• Encouraging plan sponsors to make unbiased investment advice available to workers, helping workers avoid common errors that undermine retirement security, while providing strong protections against conflicts of interest.

• Promoting the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that their retirees' living standards will be eroded by investment losses or inflation.

• Reviewing and requiring clear disclosure regarding target-date funds, which automatically shift assets among a mix of stocks, bonds, and other investments over the course of an individual's lifetime. Due to their rapidly growing popularity, these funds should be closely reviewed to help ensure that employers that offer them as part of 401(k) plans can better evaluate their suitability for their workforce and that workers have access to good choices in saving for retirement and receive clear disclosures about the risk of loss.

Here is the press release:

The White House

Office of the Press Secretary

For Immediate Release

January 25, 2010

President Obama and Vice President Biden Preview Initiatives for Middle Class Families

Discussion Previews a Key Theme for State of the Union Address

Washington, DC – Today, President Barack Obama and Vice President Joe Biden will hold a meeting of the Middle Class Task Force, where they will lay out key investments for middle class families. Today's discussion will preview one of the key themes of the President's State of the Union address, which include creating good jobs, addressing the deficit, changing Washington, and fighting for middle class families.

President Obama said, "We are fighting every single day to put Americans back to work, create good jobs, and strengthen our economy for the long-term. The additional steps laid out today focus on easing the burdens on middle class families who are struggling in this economy, and providing the help they need to get ahead."

"Every day, middle class families go to work and help make this country great. For a year, our Task Force has been hearing that they are struggling with soaring costs and squeezed family budgets. These common sense initiatives will help these families cope with these challenges," said Vice President Biden.

After traveling across the country the past year talking with families, caregivers, educators, students, seniors, as well as policy makers and experts, Chair of the White House Task Force on Middle Class Families Vice President Joe Biden will join President Obama to announce several recommendations of the Task Force. These initiatives, borne out of the meetings, travel and work of the Task Force, are aimed at helping middle class families afford soaring child care costs; care for their aging relatives; cope with the challenge of saving for retirement; and pay for their children's college tuition.

Since its creation one year ago this week, the Middle Class Task Force has held 11 meetings around the country and at the White House. At these meetings, Vice President Biden heard from parents who were grappling with the costs of child care; students coming out of college drowning in debt; children of elderly relatives struggling to care for them; and workers who were barely able to pay their mortgage, much less save for retirement.

As a result of these meetings, conversations and feedback from around the country, the Vice President and the Task Force will propose several policy initiatives to help middle class families:

1. Nearly Doubling the Child and Dependent Care Tax Credit for middle class families making under $85,000 a year. This is accomplished by increasing their tax credit rate from 20% to 35% of qualifying expenses. The value of the tax credit nearly doubles for all families making under $85,000 a year, and every family that makes under $115,000 will see their tax credit increase.
   Additionally, for families struggling to join the middle class, the administration will provide a $1.6 billion increase in child care funding, the largest one-year increase in 20 years, to help an additional 235,000 children.
   
2. Limiting a student's federal loan payments to 10 percent of his or her income above a basic living allowance. This will lower payments for hundreds of thousands of students, who are struggling to make ends meet coming out of college.
   
3. Creating a system of automatic workplace IRAs, requiring all employers to give the option for employees to enroll in a direct-deposit IRA.
   
4. Expanding tax credits to match retirement savings and enacting new safeguards to protect retirement savings, making it easier for families to plan for retirement.
   
5. Expanding support for families balancing work with caring for elderly relatives, helping them manage their multiple responsibilities and allowing seniors to live in the community for as long as possible.

The Task Force's final report, and full recommendations, will be released in February.

Additional information about these Middle Class Task Force initiatives is included in the attached fact sheet.

About the Middle Class Task Force: The Task Force, Chaired by Vice President Joe Biden, is a group of top-level administration policy makers, charged with the mission of focusing on developing policies aimed at raising the living standards of middle-class, working families in America.

Since its creation on January 30, 2009, the Middle Class Task Force has held 11 meetings around the country and at the White House:

• February 27, 2009: Green Jobs (Philadelphia, PA)
• March 17, 2009: American Recovery and Reinvestment Act and Middle Class Families (St. Cloud, MN)
• April 17, 2009: College Affordability (St. Louis, MO)
• May 26, 2009: Green Jobs (Denver, CO)
• June 23, 2009: Manufacturing in the 21st Century (Perrysburg, OH)
• July 10, 2009: Health Reform Roundtable (The White House)
• July 16, 2009: AARP/Health Care Reform Discussion (Arlington, Virginia)
• September 9, 2009: Access to College (Syracuse, NY)
• October 19, 2009: Middle Class Recovery Through Retrofit (The White House)
• November 5, 2009: Roundtable with Policy Experts (Washington, DC)
• December 16, 2009: Roundtable with Leaders in Manufacturing Sector (The White House)
  

  Members of the Task Force include: Vice President Biden, Chair; the Secretaries of Labor, Health and Human Services, Education, Energy, Treasury, Commerce, Housing and Urban Development, Transportation, and Agriculture; the Administrator of the Environmental Protection Agency; as well as the Directors of the National Economic Council, the Office of Management and Budget, the Domestic Policy Council, and the Chair of the Council of Economic Advisors.