As part of Obama’s middle-class plan he includes a proposal for an automatic IRA. This has been proposed before but it has never been implemented. Here are a few details of this plan.
Under the plan certain companies that do not currently offer a retirement plan would be required to enroll their employees in an IRA. An automatic deduction of 3% would come out of the employee’s paychecks and be deposited into the account. The employee could opt to lower or raise the deduction or opt out altogether. It is not yet determined what would be the default investment for the IRA.
The positive benefit of an Automatic IRA would be that more workers would be covered by a retirement plan. Currently about half of the workforce lack employer-based retirement plans. Many workers delay contributing to a retirement plan and an Automatic IRA would greatly increase employee savings rates.
The negative aspect of an Automatic IRA is that it would be an added administrative expense for small businesses. Although those proposing the Automatic IRA state that the expense would be low it remains to be seen if that is actually the case.