Legislation introduced today by Rep. Richard Neal (D-MA), Ranking Member of the House Ways & Means Committee, would expand retirement savings opportunities for millions of workers by requiring businesses with 10 or more employees to offer a workplace retirement plan—and quickly drew praise from retirement industry advocates.
The “Automatic IRA Act of 2024,” which has the support of the American Retirement Association and the Insured Retirement Institute, requires employers with 10 employees or more to provide or arrange for access to an automatic retirement contribution plan for all full-time and long-term part-time employees. Workers could decline to participate or drop out at any time after enrollment.
A fact sheet about the bill released by Ways & Means Committee Democrats says the Automatic IRA Act of 2024 would “dramatically expand retirement coverage of employees, gig workers, and other independent contractors. It would build upon, expand, and improve the private pension system in a manner that explicitly protects and complements employer-sponsored plans and arrangements.”
The requirement to auto-enroll employees in either an automatic IRA or an automatic contribution plan is subject to several exceptions. Importantly, the requirement does not apply to any employer that already maintains any qualified retirement plan before enactment of the bill.
“The American Retirement Association strongly supports the Automatic IRA Act that will significantly increase access to workplace retirement savings programs.”
ARA CEO Brian Graff
The bill would create a new tax credit of $500 per year for three years for employers of up to 100 employees that offer either a state or national automatic IRA, in addition to other existing tax credits.
The bill’s summary specifically pointed to the success of state auto-IRA plans as a “guide,” adding it “gave proof” to the proposed nationwide auto-IRA concept, something that works—rather than competes—with private sector 401(k)s and similar employer-sponsored plans.
It also praised the auto-IRA’s role in closing the racial, ethnic, gender, and low-income coverage and savings gaps.
“The American Retirement Association (ARA) strongly supports the Automatic IRA Act that will significantly increase access to workplace retirement savings programs,” ARA CEO Brian Graff said in a statement released this morning. “Importantly, it achieves this by leveraging the existing public-private partnership that drives the successful 401(k) system providing benefits to over 100 million Americans.”
The Insured Retirement Institute also released a statement of support for the bill.
“We appreciate Rep. Neal’s steadfast leadership and advocacy of this legislation to help America’s workers, retirees, and their families build economic equity, strengthen financial security, and protect income in a sustainable manner to last throughout their retirement years,” said Wayne Chopus, President and CEO at IRI. “We look forward to working with him and other supporters to enact this important measure.”
Nearly half of America’s workers are employed by companies that do not offer a traditional pension or a retirement savings plan, with about two-thirds of those workers at companies with 10 or more employees. Nearly 64% of workers lacking access to an employer-provided retirement plan are Latino, 53% are Black, and 45% are Asian.
A study of the impact of such a new law on workers’ retirement security found that $7 trillion in additional retirement savings would be generated, and 62 million new retirement savers would be created over 10 years. Ninety-eight percent of new savers would earn less than $100,000 annually, including seven million new Black savers and 10.8 million new Latino savers.
“The protected lifetime income provisions in this legislation will help address the anxiety many workers feel about outliving their retirement savings.”
IRI President and CEO Wayne Chopus
Additionally, the bill would expand opportunities to save for the 73.3 million American workers who participate in the gig economy. It directs the Secretary of the Treasury by regulation or other guidance to make workplace retirement plans available to individuals who provide services to an employer that do not constitute employment.
The legislation also would require employers to offer employees with at least a $200,000 vested retirement account balance the option to take a distribution of up to 50 percent of savings to purchase a lifetime income solution. This feature can provide a sustainable, protected income stream that cannot be outlived.
“The protected lifetime income provisions in this legislation will help address the anxiety many workers feel about outliving their retirement savings,” Chopus said.
TIAA’s president and CEO Thasunda Brown Duckett shared a letter of support with Rep. Neal upon today’s introduction of the Automatic IRA Act of 2024. In it, she praised the “transformative legislation” for building on “proven policy solutions,” citing that 19 states have implemented state-based automatic IRA-for-all programs for private-sector employees and adding that a federal program would help ensure workers’ pathway to retirement security no longer depends on their employer or state.
“Further, the Automatic IRA Act would provide savers with critical access to lifetime income options designed to provide a paycheck throughout retirement,” the letter said. “The certainty of a ‘paycheck for life’ will help reduce the risk retirees will outlive their savings in retirement.”
“The certainty of a ‘paycheck for life’ will help reduce the risk retirees will outlive their savings in retirement.”
TIAA President and CEO Thasunda Brown Duckett
According to IRI research, older workers are highly interested in having protected lifetime income solutions, such as annuities, included in defined contribution retirement plans. Seventy percent of workers aged 40-45 said they are very or somewhat likely to allocate a portion of retirement plan assets to annuities. Eighty-seven percent believe it is important that the income from savings is protected for life.
“Policymakers have created numerous incentives, options, and mechanisms for employers to offer workplace retirement plans,” Chopus said. “But too many employees, particularly those who work for small businesses, are still not covered by a plan. This legislation is a common-sense step to address the inequitable access to effective means for accumulating retirement savings.”
The SECURE Act of 2019 contained several bipartisan measures to facilitate the establishment of retirement savings plans for small businesses. The law included an expanded tax credit to cover some costs of setting up a plan. It also created pooled employer plans (PEPs) that small business employers can use to share a retirement plan’s administrative burden and costs. These new tools will make it easier for small business employers to comply with the new requirements established by the Automatic IRA Act.
Rep. Neal, who has championed several retirement bills into law, first introduced the Automatic IRI Act in 2017. Since its introduction, the bill has been included in IRI’s Federal Retirement Security Blueprint as a key priority for America’s workers and retirees to expand opportunities to save for retirement.
Nuts and bolts of bill
• Automatic IRAs: Under the proposed legislation, employers contribute a default percentage of an employee’s paycheck to the employee’s automatic IRA account. Employees can raise or lower their contribution percentage or can opt-out entirely from the program. Employees can choose to contribute to either a traditional IRA or Roth IRA, but if no affirmative choice is made, the default is a Roth IRA.
Under the proposal, an employer can select a provider (trustee or issuer) of a certified automatic IRA arrangement to which employee’s elective contributions will be sent. The employer also may choose to allow each individual employee to direct that the contributions be sent to an IRA selected by the employee.
The legislation directs the Treasury Secretary to issue guidance providing for automatic IRAs to be made available to individuals who provide services that do not constitute employment. This will cover gig workers, self-employed individuals, freelance workers, independent contractors, and other non-employees.
• Level of Contributions: With respect to the amount of salary or wages automatically enrolled employees would contribute (unless they affirmatively elect otherwise), the proposed legislation requires all automatic contribution plans or arrangements (except for automatic IRAs) to:
o Default at a minimum of 6% (can be higher, but only up to10% the first year and 15% thereafter).
o Automatically escalate at 1% per year up to 10%, i.e., 6% to 7% to 8% to 9% to 10%. Treasury will prescribe administrative rules to facilitate implementation of automatic escalation.
For automatic IRAs, the exact level of default contributions is not left to the employer’s discretion. The set level for default contributions is as follows:
• Year 1 – 6%
• Year 2 – 7%
• Year 3 – 8%
• Year 4 – 9%
• All subsequent years – 10%
• Investments: Automatic IRAs must offer employees (1) a target date fund, which must be the default investment, (2) a principal preservation fund, (3) a balanced fund, and (4) any others that might be added by Treasury in the future, but no other investment alternative. In general, for other automatic contribution plans and for state-based auto IRAs, current law applies with respect to investments.
• Lifetime Income Requirement: Generally with respect to 401(k)-type plans with over 100 participants, the legislation requires that such plans must permit participants to elect to receive at least 50% of their vested account balance in the form of lifetime income. This requirement does not apply for participants with balances of up to $200,000.
• Credit for Small Employer Automatic IRAs: The bill would create a new tax credit ($500 per year for 3 years) for employers of up to 100 employees that facilitate automatic IRAs (whether under this federal legislation or state law).
• Effective Dates: The legislation would apply to plan years beginning after 2026. The new credit for small employer automatic IRAs would apply to tax years beginning after 2024.
SEE ALSO:
• IRI Wants Virtually All Employees Auto Enrolled into Retirement Plans
• State Auto-IRA Assets Pass $1 Billion Milestone
• Auto-IRA, Saver’s Credit Provisions of $3.5 Trillion Spending Bill Pass Key Committee
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.