The concept of creating Individual Retirement Plan Accounts (IRA) for employees and funding those accounts through direct deposit payroll deductions is not a new concept.  However, as indicated in the Obama Administration’s 2010 Budget enacted in early May, payroll deduction IRA programs may become mandatory for many employers that do not currently offer a retirement program. 

Payroll IRA programs are and have been a part of the voluntary retirement benefits offered by employers for decades.  Employer IRA plan options come in the form of a Simplified Employee Pension Plans (SEP) or a Savings Incentive Match Plan for Employees (SIMPLE), replacing the SAR-SEP as the salary reduction IRA program for employers.  In addition, the Department of Labor and the IRS encourage employers, even those that have retirement plans to offer payroll deduction IRA programs.  In 1999, the DOL issued Interpretive Bulletin 99-1 that encouraged employers to use payroll deduction IRA programs and clarified that they would have no fiduciary responsibility for those programs.  In addition, the IRS has no annual filing requirements for a payroll deduction IRA except those required to establish accounts.  The primary difference between the existing IRA programs that can be offered by employers today and the proposal of the Obama Administration is that the proposed program will become mandatory in many cases.

While the exact enabling legislation is still being drafted, the early guidance provided in the “General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals,” often referred to as the Green Book, issued by the U.S. Department of Treasury in May 2009 identified the following key points to the proposal:

• Any employer without a retirement program (qualified plan or SIMPLE) that has been in business for at least two years and has 10 or more employees must offer a payroll deduction IRA program to its employees.  Even if the employer has a plan but places exclusions on a portion of the workforce, except those employees who are in a collective bargaining unit, are under age 18, have not completed the plan’s eligibility waiting period or are non-resident aliens, the groups that are excluded must be offered a payroll deduction IRA.
• All employees not opting out of the payroll deduction IRA plan would be automatically enrolled at a 3 percent contribution.  (This percentage can be adjusted by the employer up to the IRA contribution limits.)
• The automatic enrollees would be invested in a default fund of a type identified by the enabling legislation.  There would be no employer compliance requirements as under a qualified retirement plan.
• Employers adopting the program can claim a temporary tax credit of $25 per employee up to $250 each year for two years following implementation.  This credit could also be used by smaller employers that opt to offer a payroll deduction IRA program.
• Contributions would qualify for the SAVER’s tax credit.

 If enacted, this program would be mandatory no later than January 1, 2012.

Early indications are that this proposal has an excellent chance of being enacted because of the bi-partisan support it is getting in Congress.  Because of this fact, providers should pay close attention to future retirement legislation that will include this payroll deduction IRA program. The proposal offers a whole new market to payroll companies and 401(k) record keepers, as well as mutual fund companies, advisory firms, insurance companies, and brokerage firms.   Those that act first and decisively will have a significant advantage in capturing this enormous opportunity.

Of all the proposals regarding retirement plans being floated since the beginning of the Obama administration, the one with the most “legs” seems to be the Automatic IRA.  A concept piece that is included in the budget proposed by the administration, the Federal government would require employers that do not offer a retirement plan to its employees to offer a payroll deduction individual retirement account (Automatic IRA).  Currently, there are IRA plans for small businesses such as the Simplified Employee Pension (SEP) Plan or a Savings Incentive Match Plan for Employees (SIMPLE IRA).  However, these IRAs require employees to fund all or a portion of the account, and the SEP contributions specifically are voluntary by the employer.   

 

The thought is that the Automatic IRA program will cost employers very little to establish, and the accounts will be self-funded by the employees participating in the program.  The result would be an increase in retirement savings among the estimated 75 million American workers currently without access to an employer sponsored plan.  While all American workers under 70½ can make contributions to an IRA account now, the payroll deduction and potentially the use of automatic enrollment (unless the employee elects out of the plan a default percentage of salary will be put into the plan) will increase retirement savings as it has with 401(k) plans.  In addition, it is assumed that the amount that can be contributed to these Automatic IRAs will be greater than the $5,000 ($6,000 if you are age 50 or over) that can now be contributed to a Roth or Traditional IRA. 

 

While I believe this type of program would be extremely beneficial, there are concerns over some of the buzz about potential features.  One thought is that very small employers will be exempt.  This makes sense if you are self employed or employ only you and your spouse.  But for this to truly be beneficial all employers with employees should be required to participate. 

 

Secondly, there is some thought that the plan will be run by the Federal government and contributions will be made into “safe” investments specified by the government.  This would be a grave mistake.  The government is not equipped to record keep this type of program, and I personally would have concerns about whether or not contributions would even be “funded” or would this just be another tax such as Social Security.  The program should be regulated but administered by the private sector through payroll companies and other financial institutions that are already involved to some degree in retirement plans and IRAs. 

 

The biggest potential winners with this proposal, aside from the IRA accountholders, are the payroll companies.  However, most of them do not have IRA products.  If I were these companies, I would either create or look to partner with firms to offer this type of solution. 

 

It will be interesting to follow this legislation to see where it leads us.

 

 

By:  Lowell M. Smith, Jr.

          President, Inspira

 

 

 

 

 

 

 

Pittsburgh, PA (February 26, 2009)  Inspira, a national administrator of private-labeled Individual Retirement Accounts, has concerns over some of the proposals and opinions expressed during the House Education and Labor Committee hearing held on February 24, 2009.

“Congressman Miller’s (D-CA and Chairman of the House Education and Labor Committee) mission to improve the defined contribution system is laudable,” states Lowell Smith, President of Inspira. 

“The concept of combining 401(k), 403(b) and 457 plans into one plan-type will eliminate confusion and cost, while potentially adding fiduciary protections to plans of non-profits and government entities that have no protection under the Employee Retirement Income Security Act’s (ERISA) fiduciary provisions.  However, some of the other suggestions made at the hearing such as mandating default investments into annuities, restructuring IRAs or having an option where the Federal government manages retirement assets present unique problems,” cautions Smith.

Annuities are generally structured as insurance products, meaning the underlying assets are general assets of the insurance company issuing the annuity.  Should an insurance company go bankrupt; the annuity accountholders become creditors in the bankruptcy proceedings.  The point is while annuities are viable investment vehicles; they come with their own unique risks.

Since IRAs are primarily a supplemental retirement savings vehicle or a rollover vehicle offering more choice and estate planning options to individuals, merging them into one plan structure can create more confusion and may affect the flexibility and investment choices unique to an IRA.  Further complicating the issue is that there are significantly more assets and accounts in IRAs than in 401(k) plans.

Finally, having the Federal government manage assets of individuals is something the government has never done, meaning there is little evidence to support the assertion that the government is equipped to undertake this task.  Issues to consider include:

·         How will the fund be run?

·         How will recordkeeping be accomplished?

·         How will contributions be received?

·         What would be the investment vehicles?

·         Who would regulate the fund/plan?

“It is critical that we have a viable retirement system, but Congress should tread carefully when addressing these issues and link any changes to its long-term solution for Social Security and Medicare,” concludes Smith.

About Inspira

Headquartered in Pittsburgh, PA, Inspira was created by retirement industry experts who identified a need for an independent IRA management service. As a result, Inspira provides the IRA servicing and technology solutions that enable institutional clients to eliminate costly back-office operations while enhancing their product offerings and profits. Inspira becomes your back-office, freeing your organization to concentrate on efforts with higher-margin asset-based fees tied to selling the IRA.

No matter what type of IRA – Roth, Traditional, SEP, or SIMPLE – Inspira is the ideal third-party administrator for a financial services company’s IRA business.

Sincerely,

Lowell Smith

 

Inspira is a portfolio company of ABG Capital.