The Obama IRA

Guess who’s trying to horn in on Bill, Hymen, and David Lee by having an IRA named after him???

Well, not really, but the forced auto-enroll plan that is being bandied about as part of the sweeping financial services reform legislation does stand a chance to serve as a sort of legacy to BHO.  Here’s the plan in brief:

If an employer has 10 or more employees and does not presently offer a retirement plan, under the Obama IRA plan all employees would be automatically enrolled in a salary-deferral plan, starting with 3% of pay.  Supposedly there would be a default “conservative” portfolio, likely a money market or a target-date fund, into which the uninterested parties’ money would be funneled.  The employee would have the option to opt out or discontinue participation at any time, but they would have to make that choice explicitly – enrollment is the default.

While the idea of forcing people to begin saving for retirement seems heavy handed and big-brotherish, it’s clear that something must be done to get people involved in funding their own futures.  However, even though there are some benefits, this sort of plan has lots of problems.

For example, it’s not clear just how the accounts would be set up – who is the custodian?  How does the employer handle the salary deferrals – this would be an additional cost to the employer, obviously, increasing the overhead on payroll administration.  Typically these small businesses do not have a full-time HR staff (think Mom & Pop Diner, for example), so the additional burden would likely fall to the bookkeeper – most likely the business owner herself.  Not only is the hassle of the salary deferral going to be a burden, but someone will have to choose the custodian, work out details on default choices, and monitor the custodian (make sure he’s not a Madoff).

In addition to the concerns about an increased burden on the small business owner, I’m concerned that the plan doesn’t quite go far enough to have a meaningful impact.  While a 3% deferral is a start, it’s hardly enough to begin to make a dent in the needs of a populace that is seriously under-prepared for retirement.  Here in Illinois the minimum wage recently increased to $8 per hour – which equates to an annual salary of approximately $16,000 per year (assuming a standard 2000-hour year).  3% of that is $480.  If the employee is a very young person with a 40-plus-year timeline, putting aside such a small amount will have an impact. If, however, the employee is within five or ten years of retirement, it just amounts to an annoyance, and quite likely the employee would opt out of the plan anyhow.

On top of the small amounts (which, admittedly, can be increased by the employee), the default investment choices are not as “safe” as you might think – a money market fund won’t hardly even keep up with inflation.

I think that to make this plan really work, the government-employee TSP plan should be opened up to allow meaningful, low-cost investment choices, along with a low-overhead plan which has a robust, standard administrative process already established.  This would reduce the burden on the business owner, as well as help the employee with easy-to-understand investment choices that would give them a chance to succeed in their retirement savings activities.

So that’s my opinion, what do you think?

Photo by SuperFantastic
(this reminded me of Dooce's poor, long-suffering
dog Chuck, who apparently is a former congressman)

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author