Banks stand to benefit from President Obama's proposal that workers be automatically enrolled in individual retirement accounts.
With retirement savings dwindling, the president proposed as part of his 2011 budget an automatic payroll deduction of up to 3% of an employee's salary to be invested in a Roth individual retirement account, unless the employee chooses to opt out or to invest in a traditional IRA. This plan would be for employees who do not have other types of pensions or retirement savings plans, about 80 million workers in all.
With IRAs already big sellers in the bank channel, legislation along the lines of the president's proposal could significantly boost sales. The new Roth IRA Conversion, for example, has increased sales at many financial services companies in the past two years.
In the president's automatic IRA deduction plan, employees could opt out, but most would be expected not to. The National Council of La Raza, the largest Hispanic civil rights and advocacy organization in the United States, published a report in December showing that, when employees are automatically enrolled in retirement accounts, their savings rates jump exponentially.
And since the proportion of investors who hold 401(k) accounts fell significantly during the recession, demand for such products should rise when the economy does. As of last October, 59% of investors in the Cogent Research 2010 Investor Brandscape survey held an employer-sponsored retirement account, down from 70% a year earlier.
Companies with more than 10 employees that have been in business for at least two years would be required to participate in the automatic IRA deduction program.
Among IRA products, the Roth IRA may prove the most popular with new savers.
David John, a senior fellow at the Heritage Foundation, a conservative think tank, and managing director of the Retirement Security Project, said that, when he helped to write a proposal for the automatic IRA deduction four years ago, he was open to automatically enrolling employees in either traditional or Roth IRAs. But "it turns out that the Roth is actually better for moderate- and lower-income workers because they may or may not have the sufficient tax liability to take full advantage of the deductibility of the traditional IRA," he said in a telephone interview Tuesday.
The reality, John said, is that, for most families who earn about $35,000, not much tax is owed anyway, so they get a lesser benefit from the traditional IRA, given that income tax would be owed on money eventually withdrawn from the account.
Withdrawals from a Roth account at retirement, however, are tax-free, he said.
John noted that the automatic IRA deduction is not only for new savers but also for rollover savers who have lost their jobs and taken new jobs at smaller companies. The proposal would let them roll over their 401(k) balances into an automatic-deduction IRA and continue to save. Freelancers would also get the chance to enroll if they are part of an independent group sponsoring an automatic IRA deduction program.
"For better or worse, the traditional pension system is disappearing," said John. "Unless you're a career minimum wage worker, Social Security doesn't provide a level of income that's sufficient [to maintain one's standard of living]. So either we can make it easier for people to save for retirement from the day they start to work until the day they retire, or we'll have millions of Americans who are poverty-stricken in retirement."
David Wray, the president of the Profit Sharing/401k Council of America, a Chicago association of providers of 401(k)s and profit-sharing plans, offered some cautions, however.
In a December interview, he said that automatic enrollment only works when participants view the plan as aligned with their own goals. Just having a default, automatic-enrollment retirement savings plan is insufficient if it is not coupled with "an aggressive education effort, where the company goes and explains to participants in advance how important it is to save and why it is in their best interest," he said.
When participants do not understand why they should enroll or, in some cases, do not even know they are enrolled in a retirement savings plan, the result can be ineffective and costly.