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Congress weighs requiring employers to offer IRA direct deposits

The Baltimore Sun

For decades one statistic has barely budged: About half of American employees don't have a retirement plan at work.

That means the retirement of tens of millions of people may be largely financed by Social Security unless they have set aside savings on their own or inherit a windfall.

Now there's proposed legislation in Congress aimed at reducing that number by requiring employers that don't offer a 401(k) or any other retirement plan to do more.

Under the legislation, such employers with more than 10 workers must give employees the opportunity to make payroll deductions into an individual retirement account. It's called an automatic IRA.

The automatic IRA could be the extra push that many moderate-income workers need to save on their own. About 40 million workers would be eligible, and the nonprofit Retirement Security Project estimates annual savings could be increased by nearly $8 billion.

The legislation has bipartisan support in Congress. The architects of the automatic IRA come from conservative and liberal think tanks.

Yet not everyone is on board. At least one business group says it's opposed to any mandates. Others say the legislation would do little to solve the huge problem of lagging retirement savings.

Granted, the legislation is not a cure-all. About one-quarter of American workers are employed at companies smaller than would fall under the mandate, according to the Employee Benefit Research Institute. And some financially stretched workers would choose not to participate.

Still, if we're learning one thing as traditional pensions disappear, it's that workers need all the help they can get to save for their own retirement. Congress recognized that last year in the Pension Protection Act, when it encouraged employers to automatically enroll workers in 401(k)s.

Tom Borger, president of a property management company in Washington, has been offering a program similar to the automatic IRA for about a decade.

Raise goes to IRA

Each year, workers have the option of setting aside their pay raise in an IRA. Annual contributions these days run $2,500, with half of that coming from the employer as a match, Borger says.

"It's the responsibility of employers to encourage people to retire with something other than Social Security," Borger says.

Even so, Borger didn't want to deal with onerous and costly pension regulations, and he found IRAs were a simple way to avoid that. Nearly one-third of the 150 employees participate, Borger says.

Pierre Randolph is one of them. "It's working out excellent for me," says the 44-year-old building engineer who has more than $20,000 in an IRA. "It's primarily for my retirement, but I'm also thinking about my children. If anything happens to me, this would be something for them to fall back on," says Randolph, who recently spoke at a forum supporting the automatic IRA.

The legislation is based on a proposal by David C. John, a senior fellow at conservative Heritage Foundation, and J. Mark Iwry, a senior fellow at the liberal Brookings Institution.

The two unlikely collaborators discovered a couple of years ago while serving on a panel that they agreed more often than not on pensions and savings.

From there, they set out to design a program that would cover the millions who don't have a workplace retirement plan.

"We wanted something that was simple for both employee and employers, but didn't want to invent another type of account," John says.

Not popular

Though workers for years have been able to ask employers to direct part of their pay into an IRA, it "just hasn't caught on," Iwry says. That could change if employers were required to be more active in getting workers to contribute to an IRA, he says.

Under the proposed legislation, employers that have been in business for at least two years would have to ask workers whether they wanted to invest part of their paycheck in an IRA. The IRA could be one set up by the employee at an investment firm, for instance.

Or, employers could automatically enroll workers in an IRA at a local financial institution, although employees can always opt out.

The usual contribution limits and rules for traditional IRAs and Roth IRAs would apply to automatic IRAs.

"The employer isn't being asked to contribute a penny," although workers may be eligible for a federal tax credit for making IRA contributions, Iwry says. "Uncle Sam is providing the match."

Employers, too, would be eligible for a temporary tax credit worth up to $250 to cover any of their costs.

Small businesses aren't convinced.

'Significant strain'

"We always encourage our members to prepare for retirement and provide opportunities for their employees to prepare for retirement," says Macey Davis, tax counsel for the National Federation of Independent Business, which represents 350,000 small businesses.

"But making it mandatory causes significant strain on small businesses, particularly those that do their own accounting."

Backers of automatic IRAs say small employers already handle similar payroll transactions, such as withholding income taxes for the government.

"This is a realistic though ambitious approach," Iwry says. "If it works, it will cover tens of millions."

Adds John, "The issue we are working on is neither left, nor right, Republican or Democrat. It's a national problem and this is a common sense solution to that problem."

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by email at

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