A bill from Rep. Joe Crowley (D-N.Y.) referred to as “auto-IRA on steroids” is winding its way through the Washington legislative process and has many in the industry sitting up and taking notice.
It’s not a new proposal – Crowley, the vice Chair of the House Democratic Caucus, unveiled it a year ago. It would, however, at a federal level, require employers with 10 or more employees to open individualized retirement accounts for every employee if they do not already offer a retirement plan. These federally established “Secure, Accessible, Valuable, Efficient Universal Pension” accounts (labeled “SAVE UP” accounts) would have government oversight, private management and a limited number of low-fee index fund options.
The plan says that, once enrolled, employees will automatically begin contributing 3 percentof their pre-tax income, with employee contributions increasing gradually over time unless the employee opts out. Contributions will be pre-tax, growth of investments will be tax-free, and withdrawals during retirement will be taxed as ordinary income.
Employer Mandate
The proposal goes further than simply requiring the establishment of IRAs, however. Employers would be required to contribute to either these new SAVE UP accounts or their existing workplace retirement accounts a specific, inflation-adjusted amount per hour for every worker (last year’s proposal said that would be set at 50 cents an hour worked to start).
The plan offsets some of that employer cost by providing a refundable tax credit to employers, which would be worth the value of their contributions into the accounts of up to 10 employees — equaling up to $10,400 a year for five years. These tax credits would be open to any small business with less than $5 million in annual gross receipts, and the tax credits will be refundable, meaning that any business, including small and newly created ones that may not yet be earning profits, could still receive the credit.
Participant Investments
The plan sets a target benefit amount and “ensures risks are spread among all participants.” It says that in years with above-average returns, some stock market gains will be channeled into a collective investment pool, and conversely, in years with below-average losses, these excess funds will then be apportioned among accountholders to help protect against huge swings in the market. As a result, while payout levels would not be guaranteed, the plan claims to produce a more stable result than “other market-based retirement options.”
Earlier this year Crowley called on President Obama to issue an executive order to require government contractors to auto-enroll employees in retirement plans.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
More government intrusion, more nanny state effect, more beuracracy