From the August 2009 issue of Boomer Market Advisor • Subscribe!

August 1, 2009

Mandatory IRAs on the way

SmartMoney's Lisa Scherzer points to a proposal tucked into President Obama's financial regulatory reform legislation to get more workers saving for retirement. The plan calls for employers to set up mandatory automatic-enrollment IRAs. If the measure passes, writes Scherzer, companies that don't currently offer a tax-deferred retirement-savings plan would funnel employee contributions into IRA accounts through direct payroll deposits. It would also represent the biggest increase in new retirement savers since the creation of the 401(k) in 1980. Not that it's anything really new (she notes the idea for some form of automatic retirement savings has been raised over the past few years), it's just that it's finally on the table.

"The model's roots are in the science of behavioral finance [see BMA's March 2009 cover story], a field whose findings routinely suggest that people tend to put off doing what they know they should do. For example, rather than choosing a retirement fund from the myriad options available - a daunting task - many people do nothing. They become victims of their own inertia and ultimately come up short when they retire. The Obama initiative is meant to make decisions on workers' behalf."

She quotes David John, one of the plan's designers, as estimating the plan could direct roughly $100 billion into IRAs over five years and give some of the 75 million workers who don't have access to an employer plan an opportunity to save. And of course, a lot more business for advisors.

Reprints Discuss this story
This is where the comments go.