New Rules Could Help Millions Save for Retirement - By Janna Herron

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States may soon be able to automatically enroll workers into state-sponsored IRAs if their employers don’t offer retirement plans, thanks to a new move by the Obama Administration that circumvents Congress.

The Labor Department on Monday proposed a safe harbor from federal pension law so states can offer workers only an opt-out option—rather than an opt-in one—for these retirement plans. The proposal would also allow employers to make automatic deductions from employee paychecks to go into the state plans.

The goal is to get as many of the 68 million workers who lack access to employer retirement plans to start saving. Less than 10 percent of these workers have set up an IRA on their own, and research has shown that participation in employer 401(k) plans with automatic enrollment is 10 percentage points higher than those without.

So far, Illinois, Oregon, Washington and California have already passed legislation to create payroll-based retirement savings vehicles, while 19 other states are considering it.

“Overall, it’s a great opportunity for states to promote saving for retirement,” says John Crosby, a certified financial planner and head of the government relations committee for the Financial Planners Association in New Jersey. “Hopefully, what will happen as a byproduct is that employees are going to realize the benefit and put more money aside.”

Crosby has been working with state legislators and business groups on the state’s plan called New Jersey Secure Choice Retirement Saving Program. Under the plan, employees without workplace retirement savings plans will automatically have 3 percent of their salary deducted into the retirement plan. They can opt out if they want.

Crosby says New Jersey, along with most states considering similar plans, will outsource the management of the funds to an investment company such as Vanguard or Fidelity to select assets for the greatest return. Workers will still have to abide by IRA rules that limit contributions to $5,500 a year.

“But if you put away $5,000 every year for 40 years at 7 percent, that’s almost a million dollars,” Crosby notes.

The move by the Labor Department comes less than two weeks after the federal government introduced myRA, a basic retirement savings plan similar to a Roth IRA.

President Obama has recommended automatic IRA enrollment for employees without a workplace retirement savings plan in every budget since taking office, according to a blog post from Labor Secretary Tom Perez and Jeffrey Zients, director of the National Economic Council.

“But Congress has failed to act on this proposal,” they wrote.

Culled from The Fiscal Times