Barry’s Pickings Online: Auto IRA – Not Dead Yet

The Auto-IRA—a default, payroll-deduction IRA savings program—has been the centerpiece of President Obama’s retirement policy agenda since before he was elected. And it has been consistently opposed by Republicans, because it would “mandate” that employers who do not maintain a “workplace retirement savings plan” maintain an Auto-IRA.

Ever since the Affordable Care Act was jammed through Congress without a single Republican vote, Republicans have hated any legislation that can be characterized as a mandate. And with Republicans about to control both Congress and the White House, some believe the Auto-IRA project is a goner.

I don’t think so. Here’s why.

First, the Blue States are doing it for themselves. California, Illinois and Oregon are getting close to implementing Auto-IRA programs—Oregon’s is due to go effective July 1, 2017. Two more states—Connecticut and Maryland—passed auto-IRA legislation in May 2016. And New York City has recently floated a proposal.

It’s possible that a Trump Department of Labor could, e.g., repeal the recently finalized regulation that, in effect, exempts these state-mandated Auto-IRA programs from the Employee Retirement Income Security Act (ERISA). But that would be kind of extraordinary and extraordinarily messy. And it would actually go in the opposite direction of most Republican instincts—which are to restrict rather than to expand ERISA coverage of IRA programs.

Second, seeing this movement in the states, employers are beginning to get concerned that they are now going to be subject to Auto-IRA programs in multiple states, all with different, and in some cases conflicting, rules. To these employers, a single federal Auto-IRA is starting to look pretty good.

Third—and this is the argument I find most persuasive—the Auto-IRA is the best solution to the problem of getting employees of smaller employers to start saving for retirement. It’s way more effective, more efficient and more respective of human freedom than our current Rube Goldberg system of complicated tax incentives, matching contributions and nondiscrimination testing.

There is not room here to go deeply into the issue of the relative effectiveness of tax incentives and matching contributions versus defaults at encouraging retirement savings. Everyone agrees that defaults are effective. And, while encouraging savings through tax incentives and matching contributions (with accompanying, burdensome nondiscrimination testing) may, for larger employers, be as effective as defaults, such a program carries way too much overhead to be appealing to most small employers. It costs too much, and it’s too hard to administer. In real life, automatic enrollment is the only option available.

Moreover, automatic enrollment is more efficient—really, obviously more efficient—at encouraging savings. This is something Republicans should know intuitively: the presence of a subsidy is the most obvious indicator that the system you’re dealing with cannot be justified on simple economic terms. All of these proposals we’re seeing to subsidize small plan startups are just that: subsidies for an inefficient system. Why the heck are we paying people to save their own money? Doing so is wildly inefficient. We wind up paying some people to save who would have saved anyway. And we pay nothing to others—who truly can’t afford to and shouldn’t be saving—who could really use some extra money.

Which points out the truly cruel element of our current system. Consider a mother (or father), with a couple of kids, who has just been abandoned by her spouse. Unless she is well into the middle class and has a lot of resources, she’s not going to be able to save. She won’t get the Saver’s Credit. She won’t get any matching contributions. And she won’t get any tax benefits. All those tax incentives will go to someone else, with more disposable income.

Why am I going on about this? Because the beauty of a default—as opposed to an expensive system of tax incentives—is that it encourages people to save who should be saving. It doesn’t waste money on people who—at least for public policy purposes—are already saving enough. And it doesn’t penalize people who can’t afford to save.

So, auto-enrollment (implemented via an Auto-IRA) works. But why do we need a mandate? Why do we have to require employers who don’t maintain a retirement savings plan to install one of these things? This is critical: This isn’t about employee benefits. It’s about getting individuals to save for their retirement—especially, to save early in their working lifetime. We only need the employer because, for defaults to work, this money has to come out of the employee’s paycheck before she sees it.

Thus, what we need is not a universal employer retirement plan; we need a universal default to savings. That is the point to everything I said above—defaults, especially for employees of smaller employers—are the most effective and most efficient way to encourage workers to save. And they are the most respective of human freedom. The employer is in this process only because payroll is where we have to collect this money. If you know a better way to implement a universal retirement savings default, I’m all ears.

Which is a really longwinded way of saying to Republican policymakers: stop obsessing about the Auto-IRA being a mandate. The only thing that is mandated is that employers set up the system and remit contributions—the way they do for the Income Tax and FICA. It actually preserves freedom. There’s no employee mandate. The employee doesn’t have to contribute to get a benefit. If employee has a better use for his money, like paying for a math tutor for his child, he’s not penalized. He doesn’t lose a tax benefit or a matching contribution that everyone else is getting.

I’ve been talking about an Auto-IRA, and not, for instance and as some have suggested, an Auto-401(k) or Auto-DC plan, because IRAs come with very low employer overhead, require no “installation” and are pretty ubiquitous. If you can come up with a qualified plan that meets those criteria, I’m in.

Auto-IRAs do present some problems that are a little daunting. Most importantly: (1) If the employer doesn’t pick an IRA provider, who will?, and (2) are we going to set any minimum standards for these things—like what sorts of investment options must be offered and what level of fees will be permitted?

I have my own ideas about how to solve those problems without, in effect, inserting the federal government into the capital markets. But I’m open-minded. What we need to do is get busy on those issues and get over our obsession with mandates. An Auto-IRA is way better in nearly every respect than our current system.

Michael Barry is president of the Plan Advisory Services Group, a consulting group that helps financial services­ corporations with the regulatory issues facing their plan sponsor clients. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.