Monday, March 16, 2009

Automatic Enrollment Mandatory? Maybe?

President Obama recently released an outline of his fiscal year 2010 budget, A New Era of Responsibility: Renewing America’s Promise available here at

Of interest to this writer (and hopefully the readers) is that previous improvements to retirement arrangements that were part of the Bush tax cuts will not expire after 2010. This reinforces the permanency granted by the Pension Protection Act of 2006 (PPA). In addition, this budget also includes several proposals intended to strengthen the private retirement system.

  1. Payroll-deduction individual retirement accounts (IRAs) for workers whose employer does not sponsor a qualified retirement plan.
  2. An expansion of the Saver’s Credit.
  3. Mandatory Automatic Enrollment.

Automatic IRAs
Almost one out of every two workers – or 75 million working Americans – have no employer-sponsored retirement plan. As a solution, the budget proposal would require employers that do not offer a retirement plan to enroll employees automatically in a direct-deposit IRA program. Employees would have the ability to opt out of the savings arrangement. The budget outline provides very few details on the automatic IRA proposal. Other proposals of this type have suggested that employers with less than 10 employees or employers that have been in business less than two years would be exempted. Smaller employers (up to 100 employees) would be entitled to a tax credit for the first two years that they maintain a payroll deposit arrangement. The credit would be $25 for each employee who uses the arrangement, up to a total of $250.

Expansion of the Saver’s Credit
The Saver’s Credit is a tax credit for certain low and moderate income individuals who contribute to workplace retirement plans and IRAs. However, many Americans are unable to take advantage of the credit because they do not have any tax liability, or earn more than the AGI eligibility limit ($55,500 for families/ $27,750 for single taxpayers). The budget proposes making the credit fully refundable so that all Americans can benefit from the credit, and expanding eligibility to families earning up to $65,000 per year. The current non-refundable Savers Credit ranging from 50% down to 10% of the first $2,000 of contributions would be replaced with a uniform refundable credit of 50% of the first $1,000 for all eligible savers.

Mandatory Automatic Enrollment
Interestingly, the budget appears to not only propose automatic enrollment for payroll deduction IRA’s, but that ALL employer-sponsored retirement plans be required to automatically enroll employees. Many of you are already familiar with The Unified Success Pathway®. For those unaware, one of the keys to success, in our view, is making the default for the plan, the path of least resistance. To us that means removing as many barriers as possible to achieving retirement success. Such barriers include joining the plan, increasing deferral rates periodically, asset allocating properly and rebalancing. By automating these and requiring employees to opt out rather than opt in, plan success is more achievable. What is success? A plan that provides an adequate benefit for participants to live on during their retirement years.

Click here to learn more about The Unified Success Pathway®.