'Automatic' IRAs to Fill Retirement Gap

BOSTON (TheStreet) -- The "automatic" IRA may be on the way.

A bill filed by U.S. senators Jeff Bingaman (D-New Mexico) and John Kerry (D-Mass.) would automatically enroll most U.S. workers in individual retirement accounts if their employers don't sponsor a retirement plan. Half of American workers have no work-based retirement plan, and as many as 42 million Americans would benefit from the bill, Bingaman said in a statement.

The sponsors make their case, in part, by citing the increase in contribution rates commonly credited to automatic enrollment features now used with many 401(k) plans. Automatic IRAs would result in new contributions of about $15 billion a year, the sponsors say.

In the first year after enactment, the provision would apply only to firms with 100 or more employees; in the second year, 50 or more; in the third, 25 or more; and in the fourth, 10 or more. Workers at least 18 years old and employed for at least three months would be automatically enrolled in an IRA.

Businesses would contribute a default percentage of an employee's paycheck into an automatic IRA account. The bill sets the default at 3%, and employees could raise or lower the contribution, or opt-out.

To offset administrative costs, companies would receive a $250 tax credit for each of the first two years of their automatic IRA offering. Employers that don't offer a plan would be subject to an excise tax of $100 for each employee who was supposed to be covered.

To assist employers with selecting an IRA provider, a Web site developed by U.S. Treasury would list those that meet regulatory requirements. Employers would allow staff to select their own IRA provider.

All automatic IRAs would offer the same three standardized investment options, each to be developed with regulations and fee guidelines issued by the Treasury and Department of Labor. The options would include a "principal preservation fund" (which would include a special Treasury Retirement Bond , the R-Bond, designed for use within an automatic IRA), a "life-cycle" option and an "alternative investment option" that can include a higher concentration of equities.

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