The IRA goes Automatic
by Richard
Most of the pending legislation comprising financial regulatory reform will serve no purpose other than to add to the regulatory burden facing private enterprise.
It will boost government employment, of course, but its effect on productive America will be to function as a shadow tax….something that removes capital from the private sector as it transfers to the public domain.
All such regulation stems from two impulses.
First, the desire to take revenge on businesses that have fallen from public favor.
Second, the desire to consolidate power at the federal level. It’s not about to end anytime soon, having its origins in the Sherman Antitrust Act of 1890.
But there is one initiative in the pending bill that could positively impact private savings habits.
As the bill takes shape, we can expect a “negative option” toggle switch on IRA enrollment and funding, for employees who do not now have access to a workplace, company-sponsored retirement account such as a 401k.
Amazingly, about half of the workforce (75 million) fall into this category.
Businesses with as few as 10 employees would be required to automatically enroll their employees at a default rate of 3% of payroll income, when there are no other plan options. Employees must “opt out” if they do not wish to participate, or wish to contribute less.
This tilt towards mandatory contributions reflects our understanding of the tremendous inertia that grips most workers. Just as they are now remiss and slothful in saving, so also is it expected that they will passively acquiesce, and not opt out of such funding.
Anything that comes between Gen X’ers and their I-Pods is a distraction, so they will always take the path of least resistance.
There are two additional tweaks that would make the automatic IRA invaluable.
One would be participation in the Federal Employee Thrift Plan, so that participants can access the ultra-low cost index funds offered. This is so logical and sensible that we can expect the vast financial/retirement complex to lobby this impulse to a very early demise.
The other twist would be a very long lock up on the account, perhaps as draconian as the Social Security lockup. Short of qualifying for disability, you must wait until age 62 for reduced benefits, and soon age 67 for full retirement benefits.
What makes Social Security such an essential leg in retirement planning is not its puny return. You could do better in a passbook savings account.
It is the mandatory lockup.
Maybe the only benefit that we cannot pry out early to satisfy our spending compulsions.
Delayed gratification. An idea whose time has once again come.
