I read an interesting editorial by Laura Tyson in today’s Wall Street Journal about different ways to get Americans to start saving for retirement. The article mentioned the automatic 401(k) and something new called an automatic IRA, which would work similar to the auto 401(k) but for small companies. From the editorial:
To help the 75 million workers who don’t have access to an employer-sponsored 401(k), a bipartisan group of legislators — led by Sens.Jeff Bingaman (D., N.M.) and Gordon Smith (R., Ore.) and Reps. Phil English (R., Pa.) and Richard Neal (D., Mass.), have introduced a bill to create an Automatic IRA. This would be a standard IRA account, but funded through payroll deductions. It would also offer automatic 401(k)-like features such as an automatic investment choice, level of contribution and enrollment. Under the proposal, employers with 10 or more 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 a formal, ERISA-regulated retirement plan, or make matching contributions. Firms would receive a temporary tax credit to offset any initial administrative costs; either the employer or the employee could choose which financial institution would hold the money. The Retirement Security Project estimates that the Automatic IRA could increase IRA participation rates significantly from the current rate of one in 10, and could ultimately increase net national savings by nearly $8 billion annually.
I like this idea a lot. Especially when you consider the fact that there are lots of small employers who may not have the resources to set up a 401(k). Of course all this assumes that the employees can afford to save in the first place.