'Automatic IRA' plans: How they might work

Stewart writes for the Chicago Tribune.

Not saving a dime in a 401(k) or an IRA?

Uncle Sam wants you.

The Obama administration's plan to bring retirement accounts to more working people, a concept known as the automatic IRA, is taking shape.

Details are being hammered out, but retirement savings shortfalls are giving the idea momentum despite lingering questions:

Are there as many workers not saving as the government says? What kind of portfolio manager would the government make? Would the boss be able to implement a retirement plan correctly?

Here are the auto IRA basics:

What it is: Employers without a 401(k) plan that have been in business at least two years and have 10 or more workers would have to offer workers access to individual retirement accounts.

Your company probably would choose a financial institution to provide the IRAs through direct deposit. And your contributions of a few percentage points of pay, up to the limits of individual IRAs -- $5,000 for those younger than 50 and $6,000 for those older -- would happen automatically unless you opt out, said David John, a principal with the Retirement Security Project and senior research fellow with the Heritage Foundation. John has been involved in crafting the plan, along with J. Mark Iwry, who joined the Treasury Department in April.

Whom it helps: Designers say the proposal would target roughly 78 million Americans who don't have access to 401(k) plans at work.

But that estimate is based on the entire U.S. workforce, including the self-employed. Looking at just full-time, full-year employees ages 21 to 64, roughly 38 million are without access, notes the Employee Benefit Research Institute.

People who don't have access to a company IRA but are contributing to individual IRAs are subject to the current limits.

Where the money goes: Money in the new accounts probably would be invested in an ultra-safe Treasury bond or bond-like investment until the balance reaches a few thousand dollars, John said.

After that, the money could be rolled into pooled investments of stocks and bonds, similar to retirement target-date funds. Other possibilities include annuities.

Administrative costs on these accounts probably would be lower than on retail IRAs, but investment choices would be limited, as would the number of times a year you could change the mix.

Planners also are contemplating a Roth option.

When something goes wrong: Unlike your 401(k) plan, which is protected by the Employee Retirement Income Security Act and places strict responsibilities on employers to make sure prudent investment practices are followed, these auto IRAs would be a payroll-deposit plan with little employer responsibility.

That could be a problem if workers end up with poor or costly investment choices, some experts said.

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