A law has been proposed that would automatically deduct 3% of your paycheck into a Roth IRA. Senator Jeff Bingaman – D New Mexico – sponsored the Automatic IRA Act of 2010 .
The basics of the act would require all businesses including those small businesses with as few as 10 employees to deduct money from their employees paycheck into an auto-IRA account if the company does not have a retirement plan option. The investment choice would either be made through a company chosen by the government or invested into government bonds. The idea is to force Americans to save for their retirement. Senator Bingaman estimated that this would generate $15 Billion in savings (which would be shuttled into government bonds as a default.)
If a business owner chooses not to offer one of these two government-sponsored options, then they will have financial liability for all account-related risks. Employers will also be fined an excise tax for every employee who don’t have coverage under this Automatic IRA.
Here are just some of the downsides of this proposal:
- Lack of choices – When everything is lumped together, you tend to get the average. Not every working person is at the same age. Someone in their 30s will need or desire very different investment options than a 50 years old.
- Forced use of a Roth IRA – The Roth IRA is not the right vehicle for everyone. If you are low income and older, it would make more sense to use a regular IRA.
- Forced used of government bonds until the account reaches $5,000 – You have a choice of lifestyle funds after that if you actively requests the change. Inflation is a big concern especially for older workers who have much higher personal inflation due to health care costs. Being forced to invest solely in a special government bond may not be the best option.
- Business Owners being forced to take responsibility for their employees’ investment decisions and retirement. Why is this risk being dumped upon the small business owner?
- There is no provision to address the fact that someone is already investing in their own IRA.
- Forced use of Lifestyle Funds – These funds have not held up well during the market downturn and questions linger concerning their appropriateness for most people.
The underlying question is this: do you trust the government to handle your retirement savings in addition to Social Security. Are you comfortable with being forced to put away 3% of your paycheck with few options on how to invest or manage it?
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photo credit: Sergio Mastrello
I’m almost 100% against this. Why? I dislike the idea of the government making it compulsory for those who happen to work for smaller companies with no retirement plans to choose from a very limited set of options that historically will provide little to no return.
The only upside that I see is that those who are lax about saving in general will have no choice but to do so, which in theory would help offset the cost of “welfare” for these particular folks in later years. IN THEORY, that is.
For those who are more proactive about their personal finances, are wider range of options should be made available.
Ideally, if this passes, businesses and individuals should have the ability to opt out. Plus, if the government wants to impose this law upon people, then it should be GOVERNMENT run and administered, not foisted onto the shoulders of small business owners who probably don’t have retirement plans due to budget and manpower constraints in the first place.
I agree with you Kristina. I don’t like the excise tax that will be levied against businesses for employees who don’t do the automatic IRA. That does not even make sense to me. Taxing the employer because an employee chooses not to participate.
It just feels like more ways to divert money from businesses and individuals to the government (especially the government bonds).
Wake me when this nightmare is over, Kim.
I am sick and tired of the Federal government meddling in my life. The government is NOT smarter than the people that give it its power.
November can’t come soon enough. It’s time to sweep these BIG Government know-it-alls out of office. Once and for all.
All the best,
Len
Len Penzo dot Com
Len,
I’m also tired of checking every day for new laws that I have to follow.
I sincerely think it’s a case of our reps thinking that if they aren’t making thousands of new laws every year, then we’ll think they aren’t doing their jobs. Nothing could be further than the truth.
Len