Ways and Means Committee to Discuss IRAs

Written by Nick Curabba

In advance of today's hearing of a subcommitee of the House Ways and Means Committee, the Joint Committee on Taxation has issued a report  detailing the background and present law of individual retirement accounts.

The hearing before the Select Revenue subcommittee is expected to begin this morning at 10:00 and will explore, among other things, an idea that has garned a lot of attention recently -- namely, the concept of requiring employers to default employees into an "automatic" payroll deduction IRA.  The idea has been touted by J. Mark Iwry, a former Treasury Department official during the Clinton Administration, and current nonresident scholar at the Brookings Institution in Washington, D.C.  Mr. Iwry, as we blogged about, is also one of the authors of a recent proposal to permit temporary, or "test drive" periods of annuitization from defined contribution plans. 

The JCT publication discusses some of the automatic IRA proposals that have been introduced in both the House and Senate in the past year. Today's hearing will likely focus most particularly on H.R. 2167, the Automatic IRA Act of 2007, a bill introduced by subcommittee Chair Richard Neal (D-MA).  The Neal bill, which closely mirrors the Iwry proposal, would require employers that do not sponsor a retirement plan for their employees to offer a payroll deduction IRA program to their employees.

According to the JCT report, the bill also "includes a default for any employee who fails to make an election under which payroll deduction contributions for the employee automatically begin to be made to an IRA established for the employee. The proposal contemplates that the automatic enrollment contribution rate for employees who fail to make an affirmative election would be at three percent of compensation (but not more that the IRA dollar limit for the year). The proposal also requires employers who maintain a retirement plan to offer a payroll deduction program to employees not covered under the plan with certain exceptions. The proposal allows a newly created Thrift Savings Plan (“TSP”) board (the “TSP II Board”) that would have authority to provide for annual increases but not to a percentage that exceeds eight percent of compensation.

"The proposal provides specified default investments which include a life cycle fund similar to the life cycle funds offered under the TSP or such default investments as the TSP II Board specifies for automatic IRAs in regulations. The proposal directs the new TSP II Board to take into account the DOL regulations for default investment under qualified employer plans with automatic enrollment. The proposal also provides that the exception from the ERISA fiduciary requirements for participant-directed investments applies within seven days after the individual receives notice that an automatic IRA has been established for the individual. Finally the proposal provides that any State laws that conflict with the provision for automatic IRAs are preempted."

The proposal has received mixed reviews, with supporters suggesting it will result in more new savings, while detractors worry about mandating new plan design features in what historically has been a voluntary system.  In a way, the structure of the automatic IRA is not new.  Aside from its manadatory nature, it is much like the "old" 403(b)" market: an employer based, individually employee owned product