SOME NO-BRAINER SAVINGS IDEAS
October 31, 2007
Too many Americans are making poor choices -- or no choices at all -- to prepare financially for retirement, says Laura D'Andrea Tyson, professor of business and public policy and former dean of the Haas School of Business at the University of California, Berkeley.
Fortunately, to help the 75 million workers who don't have access to an employer-sponsored 401(k) a bipartisan group of legislators has introduced a bill to create an "Automatic IRA":
- This would be a standard IRA account, but funded through payroll deductions and would also offer automatic 401(k)-like features such as an automatic investment choice, level of contribution and enrollment.
- Employers with 10 or more employees that have been in business for at least two years would enable employees to save their own money in an IRA by using the employer's payroll system.
- The Automatic IRA allows employers to facilitate employee saving without having to sponsor a formal, Employee Retirement Income Security Act regulated retirement plan, or make matching contributions.
- Firms would receive a temporary tax credit to offset any initial administrative costs; either the employer or the employee could choose which financial institution would hold the money.
- The Retirement Security Project estimates that the Automatic IRA could increase IRA participation rates significantly from the current rate of one in 10, and could ultimately increase net national savings by nearly $8 billion annually.
The next step is to use the same automatic mechanisms to enable workers to have the security of a guaranteed lifetime retirement income with annuity-like products, says Tyson. Employees could either have annuities built into their retirement savings programs, perhaps by directing the employer match into them, or be strongly encouraged to convert all or a part of their savings upon retirement.
Source: Laura D'Andrea Tyson, "Some No-Brainer Savings Ideas," Wall Street Journal, October 30, 2007.
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