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Expanding Retirement-Savings Access for Small Business Employees

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A new proposal in Congress aims to enhance retirement-savings access for employees of small businesses, as well as gig workers and other independent contractors. The bill suggests that employers with more than 10 workers who do not offer a retirement plan should automatically enroll their employees in individual retirement accounts (IRAs) or other automatic-contribution plans such as 401(k) plans. Introduced by Rep. Richard Neal, a Massachusetts Democrat, the proposed legislation is known as the Automatic IRA Act of 2024.

Benefit for Employers

The costs associated with this requirement for businesses are anticipated to be low. Employers would be eligible for the existing startup tax credit if they adopt a plan or the proposed $500 three-year automatic IRA tax credit if they choose an automatic IRA. This incentivizes employers to participate in the program.

Filling the Retirement Gap

According to the Insured Retirement Institute (IRI), almost half of America’s workers do not have access to a traditional pension or retirement-savings plan, with around two-thirds of these workers employed by companies with at least 10 employees. The proposed measure has gained support from the IRI, an organization representing annuity providers.

State Programs as Precursors

Several states have already created IRA programs to assist workers who do not have retirement plans through their jobs. California, Illinois, Oregon, Connecticut, Maryland, Colorado, and Virginia have seen over 800,000 workers accumulate $1 billion in retirement savings through these state-run plans. The proposal at the federal level builds on these successful state programs.

Ensuring Retirement Security

“It builds on proven policy solutions: 19 states have implemented state-based automatic IRA-for-all programs for private-sector employees. A federal program would help ensure workers’ pathway to retirement security no longer depends on their employer or state,” stated Thasunda Brown Duckett, President and CEO of financial services company TIAA, in a letter of support for the proposal.

Proposed Legislation for Automatic IRAs

Under the proposed legislation, a default percentage of an employee’s paycheck would be diverted to the employee’s automatic Individual Retirement Account (IRA) account. The minimum default contribution for the first year is 6%. Employees have the flexibility to adjust their contribution percentage or opt out of the program entirely. They can choose to contribute to either a traditional IRA or Roth IRA, with the default being a Roth IRA if no choice is made.

Expanding Opportunities for Retirement Savings

The proposed legislation aims to enhance retirement savings not only for employees of small businesses but also for the 73.3 million American workers participating in the gig economy.

Inclusivity for Non-Employees

The legislation also seeks to make automatic IRAs available to individuals providing services that do not fall under formal employment arrangements. This includes gig workers, self-employed individuals, freelance workers, independent contractors, and others who are not categorized as employees.

Lifetime Income Option

Additionally, the proposal introduces a lifetime income option. Employers must offer employees with a vested retirement-account balance of at least $200,000 the opportunity to allocate up to 50% of their savings towards purchasing a lifetime income solution.

Applicability and Support

If passed, this legislation would come into effect for plan years starting after 2026. The Insured Retirement Institute (IRI) voiced their support, stating that this bill offers workers, particularly those employed by small businesses, increased opportunities to save for retirement. The IRI also highlights the importance of providing protected, guaranteed lifetime income solutions to ensure long-term retirement security.

Workers’ Desire for Protected Income Solutions

Research conducted by the IRI indicates that older workers express interest in having protected lifetime income solutions, such as annuities, included in defined-contribution retirement plans. In fact, 70% of workers aged 40 to 45 years old expressed willingness to allocate a portion of their retirement-plan assets to annuities. A staggering 87% of respondents stated the importance of protecting income from savings for life.

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