[Congressional Record Volume 152, Number 123 (Wednesday, September 27, 2006)]
[Senate]
[Pages S10291-S10302]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BINGAMAN (for himself and Mr. Smith):
  S. 3952. A bill to amend the Internal Revenue Code of 1986 to allow 
employees not covered by qualified retirement plans to save for 
retirement through automatic payroll deposit IRAs, to facilitate 
similar savings by the self-employed, and for other purposes; to the 
Committee on Finance.
  Mr. BINGAMAN. Mr. President, I rise today with my colleagues, Senator 
Smith and Senator Kerry, to introduce this important legislation that 
will ensure that more working Americans have a retirement account. This 
legislation is the result of the collaborative work done by David John 
of the Heritage Foundation and Mark Iwry of the Retirement Security 
Project to provide a simple, cost-effective way to increase retirement 
security for our Nation's workers who currently do not have a 
retirement plan. The Automatic IRA Act of 2006 will require employers 
who do not currently sponsor a retirement plan to offer their workers 
the opportunity to have part of their paycheck to be sent directly to 
an IRA. This will not only help millions of Americans begin saving for 
their retirement but will also provide subtle encouragement to 
employers to sponsor a qualified retirement account such as a SIMPLE or 
a 401(k).
  In 2004, it was estimated that as many as 71 million Americans work 
for an employer who does not offer them any kind of retirement plan--
almost half of all of our country's workers. Without an employer-
sponsored retirement plan, many of these workers will not be saving 
adequately for their retirement. The first steps to addressing this 
growing inequity are to ensure that all workers have easy access to a 
retirement account and the ability to have part of their wages go 
directly from their paycheck into this account. Both of these features 
have been proven to encourage retirement savings and are imperative if 
we are going to address our national retirement savings rate.
  Under this legislation, all employers with more than 10 employees who 
do

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not sponsor a qualified retirement or pension plan must offer its 
employees the ability to have wages remitted directly to an automatic 
IRA through payroll deduction. These employers will not be required to 
make any contributions to these accounts and will receive a tax credit 
to offset the administrative costs of remitting part of the employee's 
wages to the IRA. It is entirely up to the employer as to what IRA 
options the employees would have. For instance, the employer could 
decide to remit the funds to the IRA of the employee's choice or the 
employer could decide to remit the money to the financial institution 
of his or her choice. The employer will also have a new option--the 
ability to remit the money to a new, simplified type of IRA, the 
automatic IRA. A board, similar to the Federal Government's existing 
Thrift Savings Plan Board, would create standards for these new 
accounts that must be followed by participating financial service 
companies. This board will also be responsible for educating the public 
about the importance of having a qualified retirement account as part 
of their duties.
  Mr. President, it is going to take a bipartisan approach to address 
our Nation's retirement savings problems. I again want to applaud the 
efforts made by Mr. John of the Heritage Foundation and Mr. Iwry from 
the Retirement Security Project in advancing this proposal. It is now 
up to all of us in this Chamber to follow their example and pass this 
legislation.
  I ask unanimous consent that the material be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                    The Retirement Security Project


     pursuing universal retirement security through automatic iras

    (Testimony before the Subcommittee on Long-Term Growth and Debt 
 Reduction, Committee on Finance, United States Senate, June 29, 2006)

       Chairman Smith, Ranking Member Kerry, and Senator Grassley, 
     we appreciate the opportunity to testify before you. We are 
     submitting our testimony as a single joint statement because 
     we believe strongly in the need for a common strategy to 
     expand retirement savings, and in the importance of 
     approaching these issues in a manner that transcends 
     ideological and partisan differences.
       At the request of Committee staff, this written statement 
     focuses on our proposal to expand retirement savings for 
     small business workers--the automatic IRA. We are pleased by 
     the positive reaction the proposal has received and are 
     grateful to our colleagues, including those in government and 
     in various stakeholder organizations, who have contributed to 
     these ideas.
       With the looming retirement security crisis facing our 
     country, policy-makers from both parties are focused on ways 
     to strengthen pensions and increase savings. Our proposal for 
     automatic IRAs would provide a relatively simple, cost-
     effective way to increase retirement security for the 
     estimated 71 million workers whose employers (usually smaller 
     businesses) do not sponsor plans. It would enable these 
     employees to save for retirement by allowing them to have 
     their employers regularly transfer amounts from their 
     paycheck to an IRA.
       We are by no means suggesting that the automatic IRA 
     proposal is the only step that should be taken to expand 
     retirement savings for small business workers. In fact, we 
     have long believed in the primacy of employer-sponsored 
     retirement plans as vehicles for pension coverage. 
     Additionally, we continue to advocate strongly for the 
     expansion of pension coverage through automatic features in 
     401(k) and similar retirement savings plans.
       The automatic 401(k) approach makes intelligent use of 
     defaults--the outcomes that occur when individuals are unable 
     or unwilling to make an affirmative choice or otherwise fail 
     to act--to enlist the power of inertia to promote saving. 
     Automating enrollment, escalation of contributions, 
     investment, and rollovers expands coverage in several ways. 
     Enrolling employees in a plan unless they opt out increases 
     significantly the number of eligible employees who 
     participate in the plan. Escalating the amount of the default 
     contribution tends to increase the amount people save over 
     time. Providing for a default investment (which participants 
     can reject in favor of other alternatives) reflecting 
     consensus investment principles such as diversification and 
     asset allocation tends to raise the expected investment 
     return on contributions. Finally, making retention or 
     rollover of benefits rather than consumption the default when 
     an employee leaves a job furthers the long-term preservation 
     of retirement savings for their intended purposes. By helping 
     improve performance under the nondiscrimination standards and 
     generally making plans more effective in providing retirement 
     benefits, the automatic 401(k) can also encourage more 
     employers to sponsor or continue sponsoring plans.
       The automatic IRA builds on the success of the automatic 
     401(k). Moreover, as explained below, we would intend and 
     expect the introduction of automatic IRAs to expand the 
     number of employers that choose to sponsor 401(k) or SIMPLE 
     plans instead of offering only automatic IRAs. But for 
     millions of workers who continue to have no employer plan, 
     the automatic IRA would provide a valuable retirement savings 
     opportunity.
       The automatic IRA proposal is set out in the remainder of 
     this written statement.

                     Executive Summary of Proposal

       This testimony proposes an ambitious but practical set of 
     initiatives to expand dramatically retirement savings in the 
     United States--especially to those not currently offered an 
     employer-provided retirement plan. The essential strategy 
     here, as in the case of the automatic 401(k) described above, 
     is to make saving more automatic--and hence easier, more 
     convenient, and more likely to occur. As noted, making saving 
     easier by making it automatic has been shown to be remarkably 
     effective at boosting participation in 401(k) plans, but 
     roughly half of U.S. workers are not offered a 401(k) or any 
     other type of employer-sponsored plan. Among the 153 million 
     working Americans in 2004, over 71 million worked for an 
     employer that did not sponsor a retirement plan of any kind, 
     and another 17 million did not participate in their 
     employer's plan. This testimony explores a new and, we 
     believe, promising approach to expanding the benefits of 
     automatic saving to a wider array of the population: the 
     ``automatic IRA.''
       The automatic IRA would feature direct payroll deposits to 
     a low-cost, diversified individual retirement account. Most 
     American employees not covered by an employer-sponsored 
     retirement plan would be offered the opportunity to save 
     through the powerful mechanism of regular payroll deposits 
     that continue automatically (an opportunity now limited 
     mostly to 401(k)-eligible workers).
       Employers above a certain size (e.g., 10 employees) that 
     have been in business for at least two years but that still 
     do not sponsor any plan for their employees would be called 
     upon to offer employees this payroll-deduction saving option. 
     These employers would receive a temporary tax credit for 
     simply serving as a conduit for saving, by making regular 
     payroll deposit available to their employees. Employers would 
     receive a small additional tax credit for each employee who 
     participates. Other employers that do not sponsor a plan also 
     would receive the tax credit if they offered payroll 
     deduction saving.
       Firms would be provided a standard notice to inform 
     employees of the automatic IRA (payroll-deduction saving) 
     option, and a standard form to elicit from each employee a 
     decision either to participate or to opt out. For most 
     employees, the payroll deductions would be made by direct 
     deposit similar to the very common direct deposit of 
     paychecks to employees' accounts at their financial 
     institutions.
       To maximize participation, employers would be provided a 
     standard enrollment module reflecting current best practices 
     in enrollment procedures. The use of automatic enrollment 
     (whereby employees automatically participate at a statutorily 
     specified rate of contribution unless they opt out) would be 
     encouraged in two ways. First, the standard materials 
     provided to employers would be framed so as to present auto 
     enrollment as the presumptive enrollment method, although 
     employer would be able to opt for the alternative of 
     obtaining responses from all employees. Second, employers 
     using auto enrollment to promote participation would not need 
     to obtain responses from unresponsive employees. As discussed 
     earlier, evidence from the 401(k) universe strongly suggests 
     that high levels of participation tend to result not only 
     from auto enrollment but also from the practice of eliciting 
     from each eligible individual an explicit decision to 
     participate or to opt out.
       Employers making direct deposit or payroll deduction 
     available would be protected from potential fiduciary 
     liability and from having to choose or arrange default 
     investments. Instead, diversified default investments and a 
     handful of standard, low-cost investment alternatives would 
     be specified by statute and regulation. Payroll deduction 
     contributions would be transferred, at the employer's option, 
     to a central repository, which would remit them to IRAs 
     designated by employees or, absent employee designation, to a 
     default collective retirement account.
       Investment management as well as record keeping and other 
     administrative functions would be contracted to private 
     sector financial institutions to the fullest extent 
     practicable. Costs would be minimized through a no-frills 
     design relying on index funds, economies of scale, and 
     maximum use of electronic technologies, and modeled to some 
     degree on the Thrift Savings Plan for federal government 
     employees. Once accounts reached a predetermined balance 
     (e.g., $15,000) sufficient to make them sufficiently 
     profitable to attract the interest of the full range of IRA 
     providers, account owners would have the option to transfer 
     them to IRAs of their choosing.
       This approach involves no employer contributions, no 
     employer compliance with qualified plan or ERISA 
     requirements, and, as noted, no employer liability or 
     responsibility for selecting investments, for selecting an 
     IRA provider, or for opening IRAs for employees. It also 
     steers clear of any adverse impact on employer-sponsored 
     plans or on

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     the incentives designed to encourage firms to adopt new 
     plans. In fact, the indirect intended effect of the proposal 
     would be to draw small employers into the private pension 
     system.
       Our proposed approach would seek to capitalize on the rapid 
     trend toward automated or electronic fund transfers. With the 
     spread of new, low-cost technologies, employers are 
     increasingly using automated or electronic systems to manage 
     payroll, including withholding and federal tax deposits, and 
     for other transfers of funds. Many employers use an outside 
     payroll service provider, an on-line payroll service, or 
     software to perform these functions, including direct deposit 
     of paychecks to accounts designated by employees.
       For firms already offering direct deposit, including many 
     that use outside payroll providers, direct deposit to an IRA 
     would entail no additional cost, insofar as these systems 
     have unused fields that could be used for the additional 
     direct deposit destination. Other small businesses still 
     write paychecks by hand, complete the federal tax deposit 
     forms and Forms W-2 by hand, and deliver them to employees 
     and to the local depositary institution. Our proposal would 
     not require these employers to make the transition to 
     automatic payroll processing or use of on-line systems 
     (although it might have the effect of encouraging such 
     transitions).
       At the same time, we would not be inclined to deny payroll 
     deduction savings to all employees of employers that do not 
     yet use automatic payroll processing (and we would not want 
     to give small employers an incentive to drop automatic 
     payroll processing). These employees would benefit from the 
     ability to save through regular payroll deposits at the 
     workplace whether the deposits are made electronically or by 
     hand. Employees would still have the advantages of a method 
     of saving that, once begun, continues automatically, that is 
     more likely to begin because of workplace enrollment 
     arrangements and peer group reinforcement, and that often 
     will not reduce take-home pay. To that end, we outline below 
     a strategy to address these situations efficiently and with 
     minimal cost.
       For the self-employed and others who have no employer, 
     regular contributions to IRAs would be facilitated in three 
     principal ways: (1) extending the payroll deposit option to 
     many independent contractors who work for employers (other 
     than the very smallest businesses); (2) enabling taxpayers to 
     direct the IRS to make direct deposit of a portion of their 
     income tax refunds; and (3) expanding access to automatic 
     debit arrangements, including on-line and traditional means 
     of access through professional and trade associations that 
     could help arrange for automatic debit and direct deposit to 
     IRAs. Automatic debit essentially replicates the power of 
     payroll deduction insofar as it continues automatically once 
     the individual has chosen to initiate it.
       In addition, a powerful financial incentive to contribute 
     might be provided by means of matching deposits to the IRAs. 
     Private financial institutions that maintain the accounts 
     could deliver matching contributions and be reimbursed 
     through tax credits.


                the basic problem and proposed solution

       In general, the households that tend to be in the best 
     financial position to confront retirement are the 42 percent 
     of the workforce that participate in an employer-sponsored 
     retirement plan. For reasons we have discussed earlier, 
     traditionally, the takeup rate for IRAs (those who contribute 
     as a percentage of those who are eligible) is less than 1 in 
     10, but the takeup rate for employer-sponsored 401(k) plans 
     tends to be on the order of 7 in 10.
       Moreover, as discussed, an increasing share of 401(k) plans 
     are including automatic features that make saving easier and 
     bolster participation. When firms are not willing to sponsor 
     401(k)-type plans, the automatic IRA proposed here would 
     apply many of the lessons learned from 401(k) plans so that 
     more workers could enjoy automated saving to build assets--
     but without imposing any significant burden on employers. 
     Employers that do not sponsor plans for their employees could 
     facilitate saving by employees--without sponsoring a plan, 
     without making employer matching contributions, and without 
     complying with plan qualification or fiduciary standards. 
     Employers can help employees save simply by offering to remit 
     a portion of their pay to an IRA, preferably by direct 
     deposit, at little or no cost to the employer.
       Such direct deposit savings using IRAs would not and should 
     not replace retirement plans, such as pension, profit 
     sharing, 401(k), or SIMPLE-IRA plans. Indeed, the automatic 
     IRA would be carefully designed so as to avoid any adverse 
     effect on employer sponsorship of ``real'' plans, which must 
     adhere to standards requiring reasonably broad or 
     proportionate coverage of moderate and lower-income workers 
     and various safeguards for employees, and which often involve 
     employer contributions. Instead, payroll-deduction direct 
     deposit savings, as envisioned here, would promote wealth 
     accumulation for retirement by filling in the coverage gaps 
     around employer-sponsored retirement plans. Moreover, as 
     described below, the arrangements we propose are designed to 
     set the stage for small employers to ``graduate'' from 
     offering payroll deduction to sponsoring an actual retirement 
     plan.


               employee access to payroll deposit saving

       The automatic IRA is a means of facilitating direct 
     deposits to a retirement account, giving employees access to 
     the power of direct deposit saving. In much the same way that 
     millions of employees have their pay directly deposited to 
     their account at a bank or other financial institution, and 
     millions more elect to contribute to 401(k) plans by payroll 
     deduction, employees would have the choice to instruct the 
     employer to send an amount they select directly from their 
     paychecks to an IRA. Employers generally would be required to 
     offer their employees the opportunity to save through such 
     direct deposit or payroll-deduction IRAs.
       Direct deposit to IRAs is not new. In 1997, Congress 
     encouraged employers not ready or willing to sponsor a 
     retirement plan to at least offer their employees the 
     opportunity to contribute to IRAs through payroll deduction. 
     Both the IRS and the Department of Labor have issued 
     administrative guidance to publicize the payroll deduction or 
     direct deposit IRA option for employers and to ``facilitate 
     the establishment of payroll deduction IRAs.'' This guidance 
     has made clear that employers can offer direct deposit IRAs 
     without the arrangement being treated as employer 
     sponsorship of a retirement plan that is subject to ERISA 
     or qualified plan requirements. However, it appears that 
     few employers actually have direct deposit or payroll-
     deduction IRAs--at least in a way that actively encourages 
     employees to take advantage of the arrangement. After some 
     years of encouragement by the government, direct deposit 
     IRAs have simply not caught on widely among employers and, 
     consequently, offer little opportunity for employees to 
     save.
       With this experience in mind, we propose a new strategy 
     designed to induce employers to offer, and employees to take 
     up, direct deposit or payroll deposit saving.
     Tax credit for employers that serve as conduit for employee 
         contributions
       Under our proposal, firms that do not provide employees a 
     qualified retirement plan, such as a pension, profit-sharing, 
     or 401(k) plan, would be given an incentive (a temporary tax 
     credit) to offer those employees the opportunity to make 
     their own payroll deduction contributions to IRAs using the 
     employers' payroll systems as a conduit. The tax credit would 
     be available to a firm for the first two years in which it 
     offered payroll deposit saving to an IRA, in order to help 
     the firm adjust to any modest administrative costs associated 
     with the ``automatic IRA.'' This automatic IRA credit would 
     be designed to avoid competing with the tax credit available 
     under current law to small businesses that adopt a new 
     employer-sponsored retirement plan.


                 small business new plan startup credit

       Under current law, an employer with 100 or fewer employees 
     that starts a new retirement plan for the first time can 
     generally claim a tax credit for a portion of its startup 
     costs. The credit equals 50 percent of the cost of 
     establishing and administering the plan (including educating 
     employees about the plan) up to $500 per year. The employer 
     can claim the credit of up to $500 for each of the first 
     three years of the plan.
       Accordingly, the automatic IRA tax credit could be set, for 
     example, at $50 plus $10 per employee enrolled. It would be 
     capped at, say, $250 or $300 in the aggregate--low enough to 
     make the credit meaningful only for very small businesses, 
     and lower than the $500 three-year credit available under 
     current law for establishing a new employer plan. Employers 
     would be precluded from claiming both the new plan startup 
     credit and the proposed automatic IRA credit; otherwise, 
     somewhat larger employers might have a financial incentive to 
     limit a new plan to fewer than all of their employees in 
     order to earn an additional credit for providing payroll 
     deposit saving to other employees. As in the case of the 
     current new plan startup credit, employers also would be 
     ineligible for the credit if they had sponsored a retirement 
     plan during the preceding three years for substantially the 
     same group of employees covered by the automatic IRA.
       Example: Joe employs four people in his auto body shop, and 
     currently does not sponsor a retirement plan for his 
     employees. If Joe chooses to adopt a 401(k) or SIMPLE-IRA 
     plan, he and each of his employees generally can contribute 
     up to $15,000 (401(k)) or $10,000 (SIMPLE) a year, and the 
     business might be required to make employer contributions. 
     Under this scenario, Joe can claim the startup tax credit for 
     50 percent of his costs over three years up to $500 per year.
       Alternatively, if Joe decides only to offer his employees 
     payroll deposit to an IRA, the business will not make 
     employer contributions, and Joe can claim a tax credit for 
     each of the next two years of $50 plus $10 for each employee 
     who signs up to contribute out of his own salary.
       Employers with more than 10 employees that have been in 
     business for at least two years and that still do not sponsor 
     any plan for their employees would be called upon to offer 
     employees this opportunity to save a portion of their own 
     wages using payroll deposit. If the employer sponsored a plan 
     designed to cover only a subset of its employees (such as a 
     particular subsidiary, division or other business unit), it 
     would have to offer the payroll deposit facility to the rest 
     of its workforce (i.e., employees not in that business unit) 
     other than employees excluded from consideration under the 
     qualified plan coverage standards (union-represented 
     employees or nonresident aliens)

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     and those in the permissible qualified plan eligibility 
     waiting period. The arrangement would be structured so as to 
     avoid, to the fullest extent possible, employer costs or 
     responsibilities. The tax credit would be available both to 
     those firms that are required to offer payroll deposit to all 
     of their employees and to the small or new firms that are not 
     required to offer the automatic IRA, but do so voluntarily. 
     The intent would be to encourage, without requiring, the 
     smallest employers to participate.
     Acting as conduit entails little or no cost to employers
       For many if not most employers, offering direct deposit or 
     payroll deduction IRAs would involve little or no cost. 
     Unlike a 401(k) or other employer-sponsored retirement plan, 
     the employer would not be maintaining a plan. First, there 
     would be no employer contributions: employer contributions to 
     direct deposit IRAs would not be required or permitted. 
     Employers willing to make retirement contributions for their 
     employees would continue to do so in accordance with the 
     safeguards and standards governing employer-sponsored 
     retirement plans, such as SIMPLE-IRAs, 401(k)s, and 
     traditional pensions. (The SIMPLE-IRA is essentially a 
     payroll deposit IRA with an employee contribution limit that 
     is in between the IRA and 401(k) limits and with employer 
     contributions, but without the annual reports, plan 
     documents, and most of the other administrative requirements 
     applicable to other employer plans.)
       Employer-sponsored retirement plans are the saving vehicles 
     of choice and should be encouraged; the direct deposit IRA is 
     a fallback designed to apply to employees who are not 
     fortunate enough to be covered under an actual employer 
     retirement plan. (As discussed below, it is also intended to 
     encourage more employers to make the decision sooner or later 
     to ``graduate'' to sponsorship of an employer plan.)
       Direct deposit or payroll deduction IRAs also would 
     minimize employer responsibilities. Firms would not be 
     required to: comply with plan qualification or ERISA rules; 
     establish or maintain a trust to hold assets (since IRAs 
     would receive the contributions); determine whether employees 
     are actually eligible to contribute to an IRA; select 
     investments for employee contributions; select among IRA 
     providers, or set up IRAs for employees.
       Employers would be required simply to let employees elect 
     to make a payroll-deduction deposit to an IRA (in the manner 
     described below, with a standard notice informing employees 
     of the automatic IRA (payroll-deposit saving) option, and a 
     standard form eliciting the employee's decision to 
     participate or to opt out. Employer then would implement 
     deposits elected by employees. Employers would not be 
     required to remit the direct deposits to the IRA provider(s) 
     any faster than the timing of the federal payroll deposits 
     they are required to make. (Those deposits generally are 
     required to be made on a standard schedule, either monthly or 
     twice a week.) Nor would employers be required to remit 
     direct deposits to a variety of different IRAs specified by 
     their employees (as explained below).
       A requirement to offer payroll-deduction to an IRA would by 
     no means be onerous. It would dovetail neatly with what 
     employers already do. Employers of course are already 
     required to withhold federal income tax and payroll tax from 
     employees' pay and remit those amounts to the federal tax 
     deposit system. While this withholding does not require the 
     employer to administer an employee election of the sort 
     associated with direct deposit to an IRA, the tax withholding 
     amounts do vary from employee to employee and depend on the 
     way each employee completes IRS Form W-4 (which employers 
     ordinarily obtain from new hires to help the employer comply 
     with income tax withholding). The employee's payroll deposit 
     IRA election might be made on an attachment or addendum to 
     the Form W-4. Because employees' salary reduction 
     contributions to IRAs would ordinarily receive tax-favored 
     treatment, the employer would report on Form W-2 the reduced 
     amount of the employee's taxable wages together with the 
     amount of the employee's contribution.
     Direct deposit; automated fund transfers
       Our proposed approach would seek to capitalize on the rapid 
     trend toward automated or electronic fund transfers. With the 
     spread of new, low-cost technologies, employers are 
     increasingly using automated or electronic systems to manage 
     payroll, including withholding and federal tax deposits, and 
     for other transfers of funds. It is common for employers to 
     retain an outside payroll service provider to perform these 
     functions, including direct deposit of paychecks to accounts 
     designated by employees or contractors. Other employers use 
     an on-line payroll service that offers direct deposit and 
     check printing (or that allows employers to write checks by 
     hand). Still others do not outsource their payroll tax and 
     related functions to a third-party payroll provider but do 
     use readily available software or largely paperless on-line 
     methods to make their federal tax deposits and perhaps other 
     fund transfers, just as increasing numbers of households pay 
     bills and manage other financial transactions on line. (The 
     IRS encourages employers to use its free Electronic Federal 
     Tax Payment System for making federal tax deposits.)
       For the many firms that already offer their workers direct 
     deposit, including many that use outside payroll providers, 
     direct deposit to an IRA would entail no additional cost, 
     even in the short term, insofar as the employer's system has 
     unused fields that could be used for the additional direct 
     deposit destination. Other small businesses still write their 
     own paychecks by hand, complete the federal tax deposit forms 
     and Forms W-2 by hand, and deliver them to employees and to 
     the local bank or other depositary institution. Our proposal 
     would not require these employers to make the transition to 
     automatic payroll processing or use of on-line systems 
     (although it might have the beneficial effect of encouraging 
     such transitions).
       At the same time, we would not be inclined to deny the 
     benefits of payroll deduction savings to all employees of 
     employers that do not yet use automatic payroll processing 
     (and we would not want to give small employers an incentive 
     to drop automatic payroll processing). These employees would 
     benefit from the ability to save through regular payroll 
     deposits at the workplace whether the deposits are made 
     electronically or by hand. Employees would still have the 
     advantages of tax-favored saving that, once begun, continues 
     automatically, that is more likely to begin because of 
     workplace enrollment arrangements and peer group 
     reinforcement, and need not cause a visible reduction in 
     take-home pay if begun promptly when employees are hired.
       Accordingly, we would suggest a three-pronged strategy with 
     respect to employers that do not use automatic payroll 
     processing.
       First, a large proportion of the employers that still 
     process their payroll by hand would be exempted under the 
     exception for very small employers described below. As a 
     result, this proposal would focus chiefly on those employers 
     that already offer their employees direct deposit of 
     paychecks but have not used the same technology to provide 
     employees a convenient retirement saving opportunity.
       Second, employers would have the ease of ``piggybacking'' 
     the payroll deposits to IRAs onto the federal tax deposits 
     they currently make. The process, including timing and 
     logistics, for both sets of deposits would be the same. 
     Accompanying or appended to the existing federal tax deposit 
     forms would be a similar payroll deposit savings form 
     enabling the employer to send all payroll deposit savings to 
     a single destination. The small employer who mails or 
     delivers its federal tax deposit check and form to the local 
     bank (or whose accountant or financial provider assists with 
     this) would add another check and form to the same mailing or 
     delivery.
       Third, as noted, the existing convenient, low-cost on-line 
     system for federal tax deposits would be expanded to 
     accommodate a parallel stream of payroll deduction savings 
     payments.
       Since employers making payroll deduction savings available 
     to their employees would not be required to make 
     contributions or to comply with plan qualification or ERISA 
     requirements with respect to these arrangements, the cost to 
     employers would be minimal. They would administer and 
     implement employee elections to participate or to opt out 
     through their payroll systems. On occasion, employers might 
     need to address mistakes or misunderstandings regarding 
     employee payroll deductions and deposit directions. The time 
     and attention required of the employer could generally be 
     expected to be minimized through orderly communications, 
     written or electronic, between employees and employers, 
     facilitated by the use of standard forms that ``piggyback'' 
     on the existing IRS forms such as the W-4 used by individuals 
     to elect levels of income tax withholding.
     Exemption for small and new employers
       As discussed, the requirement to offer payroll deposit to 
     IRAs as a substitute for sponsoring a retirement plan would 
     not apply to the smallest firms (those with up to 10 
     employees) or to firms that have not been in business for at 
     least two years. However, even small or new firms that are 
     exempted would be encouraged to offer payroll deposit through 
     the tax credit described earlier. (In addition, a possible 
     approach to implementation of this program would be to 
     require payroll deposit for the first year or two only by 
     non-plan sponsors that are above a slightly larger size. This 
     would try out the new system and could identify any ``bugs'' 
     or potential improvements before broader implementation.)
       Employees of small employers that are exempted--like other 
     individuals who do not work for an employer that is part of 
     the payroll deposit system outlined here--would be able to 
     use other mechanisms to facilitate saving. These include the 
     ability to contribute by instructing the IRS to make a direct 
     deposit of a portion of an income tax refund, by setting up 
     an automatic debit arrangement for IRA contributions (perhaps 
     with the help of a professional or trade association), and by 
     other means discussed below.
     Employee Participation
       Like a 401(k) contribution, the amount elected by the 
     employee as a salary reduction contribution generally would 
     be tax-favored. It either would be a ``pre-tax'' contribution 
     to a traditional, tax-deductible IRA--deducted or excluded 
     from the employee's gross income for tax purposes--or a 
     contribution to a Roth IRA, which instead receives tax-
     favored treatment upon distribution. An employee who did not 
     qualify to

[[Page S10297]]

     make a deductible IRA contribution or a Roth IRA contribution 
     (for example, because of income that exceeds the applicable 
     income eligibility thresholds), would be responsible for 
     making the appropriate adjustment on the employee's tax 
     return. The statute would specify which type of IRA is the 
     default, and the firm would have no responsibility for 
     ensuring that employees satisfied the applicable IRA 
     requirements.
       It is often argued that a Roth IRA is the preferred 
     alternative for lowerincome individuals on the theory that 
     their marginal income tax rates are likely to increase as 
     they become more successful economically. The argument is 
     often made also that a Roth is preferable for many others on 
     the assumption that federal budget deficits will cause income 
     tax rates to rise in the future. On either of those 
     assumptions, all other things being equal, the Roth's tax 
     advantage for payouts would likely be more valuable than the 
     traditional IRA's tax deduction for contributions. In 
     addition, the Roth, by producing less taxable income in 
     retirement years, could avoid exposing the individual to a 
     higher rate of incomerelated tax on social security benefits 
     in retirement.
       This point of view, however, may well overstate the 
     probability that our tax system, including the federal income 
     tax, social security taxes, and the tax treatment of the Roth 
     IRA, will continue essentially as it is. If, instead of 
     increasing marginal tax rates, we moved to a consumption or 
     value added tax or another system that exempts savings or 
     retirement savings from tax--or if a future Congress 
     eliminated or limited the Roth income tax (and social 
     security benefits tax) advantages--the choice of a Roth over 
     a deductible IRA would entail giving up the proverbial bird 
     in the hand for two in the bush.
       Because the automatic IRA proposal would encourage but not 
     require individuals to save, the associated incentives for 
     saving are important. The instant gratification taxpayers can 
     obtain from a deductible IRA might do more to motivate many 
     households than the government's long-term promise of an 
     uncertain tax benefit in an uncertain future. (In addition, 
     by shifting the loss of tax revenues beyond the congressional 
     budget ``window'' period, the Roth also presents a special 
     challenge to a policy of fiscal responsibility.) Accordingly, 
     we are inclined to make the traditional IRA the default but 
     to allow individuals to elect payroll deposits to a Roth.
     Employees covered
       Employees eligible for payroll deposit savings might be, 
     for example, employees who have worked for the employer on a 
     regular basis (including parttime) for a specified period of 
     time and whose employment there is expected to continue. 
     Employers would not be required, however, to offer direct 
     deposit savings to employees they already cover under a 
     retirement plan, including employees eligible to contribute 
     (whether or not they actually do so) to a 401(k)-type salary-
     reduction arrangement. Accordingly, as discussed, an employer 
     that limits retirement plan coverage to a portion of its 
     workforce generally would be required to offer direct deposit 
     or other payroll deduction saving to the rest of the 
     workforce.


                           the automatic ira

     Obstacles to participation
       Even if employers were required to offer direct deposit to 
     IRAs, various impediments would prevent many eligible 
     employees from taking advantage of the opportunity. To save 
     in an IRA, individuals must make a variety of decisions and 
     must overcome inertia. At least five key questions are 
     involved in the process for employees:
       a) whether to participate at all;
       b) where (with which financial institution) to open an IRA 
     (or, if they have an IRA already, whether to use it or open a 
     new one);
       c) whether the IRA should be a traditional or Roth IRA;
       d) how much to contribute to the IRA; and
       e) how to invest the IRA.
       Once these decisions have been made, the individual must 
     still take the initiative to fill out the requisite paperwork 
     (whether on paper or electronically) to participate. Even in 
     401(k) plans, where decisions (b) and, unless the plan offers 
     a Roth 401(k) option, (c) are not required, millions of 
     employees are deterred from participating because of the 
     other three decisions or because they simply do not get 
     around to enrolling in the plan.
     Overcoming the obstacles to participation: Encouraging 
         automatic enrollment
       These obstacles can be overcome by making participation 
     easier and more automatic, in much the same way as is being 
     done increasingly in the 401(k) universe. An employee 
     eligible to participate in a 401(k) plan automatically has a 
     savings vehicle ready to receive the employee's contributions 
     (the plan sponsor sets up an account in the plan for each 
     participating employee) and benefits from a powerful 
     automatic savings mechanism in the form of regular payroll 
     deduction. With payroll deduction as the method of saving, 
     deposits continue to occur automatically and regularly--
     without the need for any action by the employee--once the 
     employee has elected to participate. And finally, to jump-
     start that initial election to participate, an increasing 
     percentage of 401(k) plan sponsors are using ``automatic 
     enrollment.''
       Auto enrollment tends to work most effectively when it is 
     followed by gradual escalation of the initial contribution 
     rate. The automatic contribution rate can increase either on 
     a regular, scheduled basis, such as 4 percent in the first 
     year, 5 percent in the second year, etc., or in coordination 
     with future pay raises. But if the default mode is 
     participation in the plan (as it is under auto enrollment), 
     employees no longer need to overcome inertia and take the 
     initiative in order to save; saving happens automatically, 
     even if employees take no action.
       Employers offering payroll deposit saving to an IRA should 
     be explicitly permitted to arrange for appropriate automatic 
     increases in the automatic IRA contribution rate. However, an 
     employer facilitating saving in an automatic IRA has far less 
     of an incentive to use automatic escalation (or to set the 
     initial automatic contribution rate as high as it thinks 
     employees will accept) than an employer sponsoring a 401(k) 
     plan. The 401(k) sponsor generally has a financial incentive 
     to encourage nonhighly compensated employees to contribute as 
     much as possible, because their average contribution level 
     determines how much highly compensated employees can 
     contribute under the 401(k) nondiscrimination standards. 
     Because no nondiscrimination standards apply to IRAs, 
     employers have no comparable incentive to maximize 
     participation and contributions to IRAs.
       Automatic enrollment, which has typically been applied to 
     newly hired employees (as opposed to both new hires and 
     employees who have been with the employer for some years), 
     has produced dramatic increases in 401(k) participation. This 
     is especially true in the case of lower-income and minority 
     employees. In view of the basic similarities between employee 
     payroll-deduction saving in a 401(k) and under a direct 
     deposit IRA arrangement, the law should, at a minimum, 
     permit employers to automatically enroll employees in 
     direct deposit IRAs.
       The conditions imposed by the Treasury Department on 401(k) 
     auto enrollment would apply to direct or payroll deposit IRA 
     auto enrollment as well: all potentially auto enrolled 
     employees must receive advance written notice (and annual 
     notice) regarding the terms and conditions of the saving 
     opportunity and the auto enrollment, including the procedure 
     for opting out, and all employees must be able to opt out at 
     any time.
       It is not at all clear, however, whether simply allowing 
     employers to use auto enrollment with direct deposit IRAs 
     will prove to be effective. A key motivation for using auto 
     enrollment in 401(k) plans is to improve the plan's score 
     under the 401(k) nondiscrimination test by encouraging more 
     moderate- and lower-paid (``nonhighly compensated'') 
     employees to participate, which in turn increases the 
     permissible level of tax-preferred contributions for highly 
     compensated employees. This motivation is absent when the 
     employer is merely providing direct deposit IRAs, rather than 
     sponsoring a qualified plan such as a 401(k), because no 
     nondiscrimination standards apply unless there is a plan.
       A second major motivation for using 401(k) auto enrollment 
     in many companies is management's sense of responsibility or 
     concern for employees and their retirement security. Many 
     executives involved in managing employee plans and benefits 
     have opted for auto enrollment because they believe far too 
     many employees are saving too little and investing unwisely 
     and need a strong push to ``do the right thing'' and take 
     advantage of the 401(k) plan. This motivation--by no means 
     present in all employers--is especially unlikely to be 
     driving an employer that merely permits payroll deposit to 
     IRAs without sponsoring a retirement plan.
       Third, employers might have greater concern about potential 
     employee reaction to auto enrollment in the absence of an 
     employer matching contribution. The high return on employees' 
     investment delivered by the typical 401(k) match helps give 
     confidence to 401(k) sponsors using auto enrollment that they 
     are doing right by their employees and need not worry unduly 
     about potential complaints from workers who failed to read 
     the notice.
       Finally, an employer concern that has made some plan 
     sponsors hesitate to use auto enrollment with 401(k) plans 
     might loom larger in the case of auto enrollment with direct 
     deposit IRAs. This is the concern about avoiding a possible 
     violation of state laws that prohibit deductions from 
     employee paychecks without the employee's advance written 
     authorization. Assuming most direct deposit IRA arrangements 
     are not employer plans governed by ERISA, such state laws, as 
     they apply to automatic IRAs, may not be preempted by ERISA 
     because they do not ``relate to any employee benefit plan.'' 
     For reasons such as these, without a meaningful change in the 
     law, most employers that are unwilling to offer a qualified 
     plan today are unlikely to take the initiative to 
     automatically enroll employees in direct deposit IRAs.
     Not requiring employers to use automatic enrollment
       One possible response would be to require employers to use 
     automatic enrollment in conjunction with the direct deposit 
     IRAs (while giving the employers a tax credit and legal 
     protections). The argument for such a requirement would be 
     that it would likely increase participation dramatically 
     while preserving employee choice (workers could always opt 
     out), and that, for the reasons summarized above, employers 
     that do not provide a qualified plan (or a match) are 
     unlikely to use auto enrollment voluntarily.

[[Page S10298]]

     The arguments against such a requirement include the concern 
     that a workforce that presumably has not shown sufficient 
     demand for a qualified retirement plan to induce the employer 
     to offer one might react unfavorably to being automatically 
     enrolled in direct deposit savings without a matching 
     contribution. (In addition, some small business owners who 
     have only a few employees and work with all of them on a 
     daily basis might take the view that automatic enrollment is 
     unnecessary because of the constant flow of communication 
     between the owner and each employee.)
       It is noteworthy, however, that recent public opinion 
     polling shows strong support among registered voters for 
     making saving easier by making it automatic, with 71 percent 
     of respondents favoring a fully automatic 401(k), including 
     automatic enrollment, automatic investment, and automatic 
     contribution increases over time, with the opportunity to opt 
     out at any stage. A vast majority (85 percent) of voters said 
     that if they were automatically enrolled in a 401(k), they 
     would not opt out, even when given the opportunity to do so. 
     In addition, given the choice, 59 percent of respondents 
     preferred a workplace IRA with automatic enrollment to one 
     without.
     Requiring explicit ``Up or Down'' employee elections while 
         encouraging auto enrollment
       An alternative approach that has been used in 401(k) plans 
     and might be particularly well suited to payroll deposit 
     savings is to require all eligible employees to submit an 
     election that explicitly either accepts or declines direct 
     deposit to an IRA. Instead of treating employees who fail to 
     respond as either excluded or included, this ``up or down'' 
     election approach has no default. There is evidence 
     suggesting that requiring employees to elect one way or the 
     other can raise 401(k) participation nearly as much as auto 
     enrollment does. Requiring an explicit election picks up many 
     who would otherwise fail to participate because they do not 
     complete and return the enrollment form due to 
     procrastination, inertia, inability to decide on investments 
     or level of contribution, and the like.
       Accordingly, a possible strategy for increasing 
     participation in payroll deposit IRAs would be to require 
     employers to obtain a written (including electronic) ``up or 
     down'' election from each eligible employee either accepting 
     or declining the direct deposit to an IRA. Under this 
     strategy, employers that voluntarily auto enroll their 
     employees in the direct deposit IRAs would be excused from 
     the requirement that they obtain an explicit election from 
     each employee because all employees who fail to elect would 
     be participating. This exemption--treating an employer's use 
     of auto enrollment as an alternative means of satisfying its 
     required-election obligation--would add an incentive for 
     employers to use auto enrollment without requiring them to 
     use it. Any firms that prefer not to use auto enrollment 
     would simply obtain a completed election from each employee, 
     either electronically or on a paper form. And either way--
     whether the employer chose to use auto enrollment or the 
     required-election approach--participation would likely 
     increase significantly, perhaps even approaching the level 
     that might be achieved if auto enrollment were required for 
     all payroll deposit IRAs.
       This combined strategy for promoting payroll deposit IRA 
     participation could be applied separately to new hires and 
     existing employees: thus, an employer auto enrolling new 
     hires would be exempted from obtaining completed elections 
     from all new hires (but not from existing employees), while 
     an employer auto enrolling both new hires and existing 
     employees would be excused from having to obtain elections 
     from both new hires and existing employees.
       The required election would not obligate employers to 
     obtain a new election from each employee every year. Once an 
     employee submitted an election form, that employee would not 
     be required to make another election: as in most 401(k) 
     plans, the initial election would continue throughout the 
     year and from year to year unless and until the employee 
     chose to change it. Similarly, an employee who failed to 
     submit an election form and was auto enrolled by default in 
     the payroll deposit IRA would continue to be auto enrolled 
     unless and until the employee took action to make an explicit 
     election.
       To maximize participation, employers would receive a 
     standard enrollment module reflecting current best practices 
     in enrollment procedures. A nationwide website with standard 
     forms would serve as a repository of state-of-the-art best 
     practices in and savings education. The use of automatic 
     enrollment (whereby employees automatically are enrolled at a 
     statutorily specified rate of contribution--such as 3% of 
     pay--unless they opt out) would be encouraged in two ways. 
     First, the standard materials provided to employers would be 
     framed so as to present auto enrollment as the presumptive or 
     perhaps even the default enrollment method, although 
     employers would be easily able to opt out in favor of simply 
     obtaining an ``up or down'' response from all employees. In 
     effect, such a ``double default'' approach would use the same 
     principle at both the employer and employee level by auto 
     enrolling employers into auto enrolling employees. Second, as 
     noted, employers using auto enrollment to promote 
     participation would not need to obtain responses from 
     unresponsive employees.
     Compliance and enforcement
       Employers' use of the required-election approach would also 
     help solve an additional problem--enforcing compliance with a 
     requirement that employers offer direct deposit savings. As a 
     practical matter, many employers might question whether the 
     IRS would ever really be able to monitor and enforce such a 
     requirement. Employers may believe that, if the IRS asked an 
     employer why none of its employees used direct deposit IRAs, 
     the employer could respond that it told its employees about 
     this option and they simply were not interested. However, if 
     employers that were required to offer direct deposit savings 
     had to obtain a signed election from each eligible employee 
     who declined the payroll deposit option, employers would know 
     that the IRS could audit their files for each employee's 
     election. This by itself would likely improve compliance.
       In fact, a single paper or e-mail notice could advise the 
     employee of the opportunity to engage in payroll deduction 
     savings and elicit the employee's response. The notice and 
     the employee's election might be added or attached to IRS 
     Form W-4. (As noted, the W-4 is the form an employer 
     ordinarily obtains from new hires and often from other 
     employees to help the employer comply with its income tax--
     withholding obligations.) If the employer chose to use auto 
     enrollment, the notice would also inform employees of that 
     feature (including the default contribution level and 
     investment and the procedure for opting out), and the 
     employer's records would need to show that employees who 
     failed to submit an election were in fact participating in 
     the payroll deduction savings.
       Employers would be required to certify annually to the IRS 
     that they were in compliance with the payroll deposit savings 
     requirements. This might be done in conjunction with the 
     existing IRS Form W-3 that employers file annually to 
     transmit Forms W-2 to the government. Failure to offer 
     payroll deposit savings would ultimately need to be backed up 
     by an appropriate sanction, such as the threat of civil 
     monetary penalties or an excise tax.
     Portability of savings
       IRAs are inherently portable. Unlike a 401(k) or other 
     employer plan, an IRA survives and functions independently of 
     the individual saver's employment status. Thus the IRA owner 
     is not at risk of forfeiting or losing the account or 
     suffering an interruption in the ability to contribute when 
     changing or losing employment. As a broad generalization, the 
     automatic IRAs outlined here presumably would be freely 
     transferable to and with other IRAs and qualified plans that 
     permit such transfers. (However, as discussed below, the 
     investment limitations and other cost-containment features of 
     these IRAs raise the issue of whether transferability to 
     other types of vehicles should be subject to 
     restrictions.)


                   making a savings vehicle available

       Most current direct deposit arrangements use a payroll-
     deduction savings mechanism similar to the 401(k), but, 
     unlike the 401(k), do not give the employee a ready-made 
     vehicle or account to receive deposits. The employee must 
     open a recipient account and must identify the account to the 
     employer. However, where the purpose of the direct deposit is 
     saving, it would be useful to many individuals who would 
     rather not choose a specific IRA to have a ready-made 
     fallback or default account available for the deposits.
       Under this approach, modeled after the SIMPLE-IRA, which 
     currently covers an estimated 2 million employees, 
     individuals who wish to direct their contributions to a 
     specific IRA would do so. The employer would follow these 
     directions as employers ordinarily do when they make direct 
     deposits of paychecks to accounts specified by employees. At 
     the same time, the employer would also have the option of 
     simplifying its task by remitting all employee contributions 
     in the first instance to IRAs at a single private financial 
     institution that the employer designates. However, even in 
     this case, employees would be able to transfer the 
     contributions, without cost, from the employer's designated 
     financial institution to an IRA provider chosen by the 
     employee.
       By designating a single IRA provider to receive all 
     contributions, the employer could avoid the potential 
     administrative hassles of directing deposits to a multitude 
     of different IRAs for different employees, while employees 
     would be free to transfer their contributions from the 
     employer's designated institution to an IRA provider of their 
     own choosing. Even this approach, though, still places a 
     burden on either the employer or the employee to choose an 
     IRA. For many small businesses, the choice might not be 
     obvious or simple. In addition, the market may not be very 
     robust because at least some of the major financial 
     institutions that provide IRAs may well not be interested in 
     selling new accounts that seem unlikely to grow enough to be 
     profitable within a reasonable time. Some of the major 
     financial firms appear to be motivated at least as much by a 
     desire to maximize the average account balance as by the goal 
     of maximizing aggregate assets under management. They 
     therefore may shun small accounts that seem to lack much 
     potential for rapid growth.
       The current experience with automatic rollover IRAs is a 
     case in point. Firms are required to establish these IRAs as 
     a default vehicle for qualified plan participants whose 
     employment terminates with an account balance of not more 
     than $5,000 and who fail to provide any direction regarding 
     rollover or

[[Page S10299]]

     other payout. The objective is to reduce leakage of benefits 
     from the tax-favored retirement system by stopping 
     involuntary cashouts of account balances between $1,000 and 
     $5,000. (Plan sponsors continue to have the option to cash 
     out balances of up to $1,000 and to retain in the plan 
     account balances between $1,000 and $5,000 instead of rolling 
     them over to an IRA.) Because plan sponsors are required to 
     set up IRAs only for ``unresponsive'' participants--those who 
     fail to give instructions as to the disposition of their 
     benefits--these IRAs are presumed to be less likely than 
     other IRAs are to attract additional contributions. 
     Accordingly, significant segments of the IRA provider 
     industry have not been eager to cater to this segment of the 
     market. As a result, plan sponsors have tended to reduce 
     their cashout level from $5,000 to $1,000 so that new IRAs 
     would not have to be established.
       For somewhat similar reasons, IRA providers might expect 
     payroll deposit IRAs to be less profitable than other 
     products. As a result, employers and employees might well 
     find that providers are not marketing to them aggressively 
     and that the array of payroll deposit IRA choices is 
     comparatively limited.
       The prospect of tens of millions of personal retirement 
     accounts with relatively small balances likely to grow 
     relatively slowly suggests that the market may need to be 
     encouraged to develop widely available low-cost personal 
     accounts or IRAs. Otherwise, for ``small savers,'' fixed-cost 
     investment management and administrative fees may consume too 
     much of the earnings on the account and potentially even 
     erode principal.
     A standard default account
       Accordingly, to facilitate saving and minimize costs, we 
     believe that a strong case can be made for a default IRA that 
     would be automatically available to receive direct deposit 
     contributions without requiring either the employee or 
     employer to choose among IRA providers and without requiring 
     the employee to take the initiative to open an IRA. Under 
     this approach, for the convenience of both employees and 
     employers, those who wish to save but have no time or taste 
     for the process of locating and choosing an IRA would be able 
     to use a standard default, or automatic, account. If neither 
     the employer nor the employee designated a specific IRA 
     provider, the contributions would go to a personal retirement 
     account within a plan that would in some respects resemble 
     the federal Thrift Savings Plan (the 401(k)-type retirement 
     savings plan that covers federal government employees).
       These standard default accounts would be maintained and 
     operated by private financial institutions under contract 
     with the federal government. To the fullest extent 
     practicable, the private sector would provide the investment 
     funds, investment management, record keeping, and related 
     administrative services. To serve as a default account for 
     direct deposits that have not been directed elsewhere by 
     employers or employees, an account need not be maintained by 
     a governmental entity. Given sufficient quality control and 
     adherence to reasonably uniform standards, various private 
     financial institutions could contract to provide the default 
     accounts, on a collective or individual institution basis, 
     more or less interchangeably--perhaps allocating customers on 
     a geographic basis or in accordance with other 
     arrangements based on providers' capacity. These fund 
     managers could be selected through competitive bidding. 
     Once individual default accounts reached a predetermined 
     balance (e.g., $15,000) sufficient to make them 
     potentially profitable for many private IRA providers, 
     account owners would have the option to transfer them to 
     IRAs of their choosing.
     Cost containment
       Both the direct deposit IRAs expressly selected by 
     employees and employers and the standardized direct deposit 
     IRAs that serve as default vehicles would be designed to 
     minimize the costs of investment management and account 
     administration. It should be feasible to realize substantial 
     cost savings through index funds, economies of scale in asset 
     management and administration, uniformity, and electronic 
     technologies.
       In accordance with statutory guidelines for all direct 
     deposit IRAs, government contract specifications would call 
     for a no-frills approach to participant services in the 
     interest of minimizing costs. By contrast to the wide open 
     investment options provided in most current IRAs and the high 
     (and costlier) level of customer service provided in many 
     401(k) plans, the standard account would provide only a few 
     investment options (patterned after the Thrift Savings Plan, 
     if not more limited), would permit individuals to change 
     their investments only once or twice a year, and would 
     emphasize transparency of investment and other fees and other 
     expenses.
       Specifically, costs of direct deposit IRAs might be reduced 
     by federal standards that, to the extent possible,
       Exclude brokerage services and retail equity funds from the 
     investment options available under the IRA.
       Limit the number of investment options under the IRA.
       Allow individuals to change their investments only once or 
     twice per year.
       Specify a low-cost default investment option and provide 
     that, if any of an individual's account balance is invested 
     in the default option, all of it must be.
       Prohibit loans (IRAs do not allow them in any event) and 
     perhaps limit preretirement withdrawals.
       Limit access to customer service call centers.
       Preclude commissions.
       Make compliance testing unnecessary.
       Give account owners only a single account statement per 
     year (especially if daily valuation is built into the system 
     and is available to account owners).
       Encourage the use of electronic and other new technologies 
     (including enrollment on a web site) for fund transfers, 
     record keeping, and communications among IRA providers, 
     participating employees, and employers to reduce paperwork 
     and cost. Electronic administration has considerable 
     potential to cut costs.
       The availability to savers of a major low-cost personal 
     account alternative in the form of the standard account may 
     even help, through market competition, to drive down the 
     costs and fees of IRAs offered separately by private 
     financial institutions. Through efficiencies associated with 
     collective investment and greater uniformity, the standard 
     account should help move the system away from the retail-type 
     cost structure characteristic of current IRAs. It should also 
     help create a broad infrastructure of individual savings 
     accounts that would cover most of the working population.
       In conjunction with these steps, Congress and the 
     regulators may be able to do more to require simplified, 
     uniform disclosure and description of IRA investment and 
     administrative fees and charges (building on previous work by 
     the Department of Labor relating to 401(k) fees). Such 
     disclosure should help consumers compare costs and thereby 
     promote healthy price competition.
       Another approach would begin by recognizing the trade-off 
     between asset management costs and investment types. As a 
     broad generalization, asset management charges tend to be low 
     for money market funds, certificates of deposit, and certain 
     other relatively low-risk, lower-return investments that 
     generally do not require active management. However, it 
     appears that limiting individual accounts to these types of 
     investments would be unnecessarily restrictive. As discussed 
     below (under ``Default Investment Fund''), passively managed 
     index funds, such as those used in the Thrift Savings Plan, 
     are also relatively inexpensive.
       A very different approach to cost containment would be to 
     impose a statutory or regulatory limitation on investment 
     management and administrative fees that providers could 
     charge. One example is the United Kingdom's limit on 
     permissible charges for management of ``stakeholder pension'' 
     accounts--an annual 150 basis point fee cap for five years 
     that is scheduled to drop to 100 basis points thereafter. As 
     another and more limited example, the U.S. Department of 
     Labor has imposed a kind of limitation on fees charged by 
     providers of automatic rollover IRAs established by employers 
     for terminating employees who fail to provide any direction 
     regarding the disposition of account balances of up to 
     $5,000. Labor regulations provide a fiduciary safe harbor 
     for auto rollover IRAs that preserve principal and that do 
     not charge fees greater than those charged by the IRA 
     provider for other IRAs it provides.
       Presumably, a mandatory limit would give rise to potential 
     cross-subsidies from products that are free of any limit on 
     fees to the IRAs that are subject to the fee limit--a result 
     that could be viewed either as an inappropriate distortion or 
     as a necessary and appropriate allocation of resources. We 
     would view a mandatory limit as a last resort, preferring the 
     market-based strategies outlined above.
     Default investment fund
       Both the IRAs offered independently by private financial 
     institutions and explicitly selected by employees or 
     employers and the default IRAs would serve the important 
     purpose of providing low-cost professional asset management 
     to millions of individual savers, presumably improving their 
     aggregate investment results. To that end, all of these 
     accounts would offer a similar, limited set of investment 
     options, including a default investment fund in which 
     deposits would automatically be invested unless the 
     individual chose otherwise. This default investment would be 
     a highly diversified ``target asset allocation'' or ``life-
     cycle'' fund comprised of a mix of equities and fixed income 
     or stable value investments, and probably relying heavily on 
     index funds. (The life-cycle funds recently introduced into 
     the federal Thrift Savings Plan are one possible model.) A 
     portion or all of the fixed income component could be 
     comprised of Treasury inflation protected securities 
     (``TIPS'') to protect against the risk of inflation.
       The mix of equities and fixed income would be intended to 
     reflect the consensus of most personal investment advisers, 
     which emphasizes sound asset allocation and diversification 
     of investments--including exposure to equities (and perhaps 
     other assets that have higher-risk and higher-return 
     characteristics), at least given the foundation of retirement 
     income already delivered through Social Security and assuming 
     the funds will not shortly be needed for expenses. The use of 
     index funds would avoid the costs of active investment 
     management while promoting wide diversification.
       This default investment would actually consist of several 
     different funds, depending on the individual's age, with the 
     more conservative investments (such as those relying

[[Page S10300]]

     more heavily on TIPS) applicable to older individuals who are 
     closer to the time when they might need to use the funds. 
     Individuals who selected the default fund or were defaulted 
     into it would have their account balances entirely invested 
     in that fund. However, they would be free to exit the fund at 
     specified times and opt for a different investment option 
     among those offered within the IRA.
       The standard automatic (default) investment would also 
     serve two other key purposes. It would encourage employee 
     participation in direct deposit savings by enabling employees 
     who are satisfied with the default to simplify what may be 
     the most difficult decision they would otherwise be required 
     to make as a condition of participation (i.e., how to 
     invest). Finally, the standard default investment should 
     encourage more employers to use automatic enrollment (thereby 
     boosting employee participation) by saving them from having 
     to choose a default investment. This, in turn, would make it 
     easier to protect employers from responsibility for IRA 
     investments, especially employers using automatic enrollment 
     (as discussed below).
       We would not fully specify the default investment by 
     statute. It is desirable to maintain a degree of flexibility 
     in order to reflect a consensus of expert financial advice 
     over time. Accordingly, general statutory guidelines would be 
     fleshed out at the administrative level after regular comment 
     by and consultation with private-sector investment experts.
       An additional and major design issue is whether the 
     standard, limited set of investment options for payroll 
     deposit IRAs should be only a minimum set of options in each 
     IRA, so that the IRA provider would be permitted to provide 
     any additional options it wished. Limiting the IRAs to these 
     specified options would best serve the purposes of containing 
     costs, improving investment results for IRA owners in the 
     aggregate, and simplifying individuals' investment choices. 
     At the same time, such restrictions would constrain the 
     market, potentially limit innovation, and limit choice for 
     individuals who prefer other alternatives.
       One of the ways to resolve this tradeoff would be to limit 
     direct deposit IRAs to the prescribed array of investment 
     options without imposing any comparable limits on other IRAs, 
     and to allow owners of direct deposit IRAs (including default 
     IRAs) to transfer or roll over their account balances between 
     the two classes of accounts. Under this approach, the owner 
     of a direct deposit IRA could transfer the account balance to 
     other (unrestricted) IRAs that are willing to accept such 
     transfers (but perhaps only after the account balance reaches 
     a specified amount that would no longer be unprofitable to 
     most IRA providers). While such a transfer to an unrestricted 
     IRA would deprive the owner of the cost-saving advantages of 
     the no-frills, limited-choice model, such a system would 
     still enable individuals to retain the efficiencies and cost 
     protection associated with the standard low-cost model if 
     they so choose.
     Employers protected from any risk of fiduciary liability
       Employers traditionally have been particularly concerned 
     about the risk of fiduciary liability associated with their 
     selection of retirement plan investments.
       This concern extends to the employer's designation of 
     default investments that employees are free to decline in 
     favor of alternative investments. In the IRA universe, 
     employers transferring funds to automatic rollover IRAs and 
     employer-sponsored SIMPLE-IRAs retain a measure of fiduciary 
     responsibility for initial investments.
       By contrast, under our proposal, employers making direct 
     deposits would be insulated from such potential liability. 
     These employers would have no liability or fiduciary 
     responsibility with respect to the manner in which direct 
     deposits are invested in default IRAs or in nondefault IRAs 
     (whether selected by the employer or the employee), nor would 
     employers be exposed to potential liability with respect to 
     any employee's choice of IRA provider or type of IRA. This 
     protection of employers is facilitated by statutory 
     designation of standard investment types that reduces the 
     need for continuous professional investment advice. To 
     protect workers against inappropriate IRA providers or 
     inappropriate employer selection of IRA providers while 
     continuing to insulate employers from fiduciary 
     responsibility, employers could be precluded from imposing a 
     particular IRA provider on its employees other than the 
     government-contracted default IRA or could be constrained to 
     choose among an approved list of providers based on capital 
     adequacy, soundness, and other criteria.
     Public opinion polling
       Recent public opinion polling has shown overwhelming 
     support for payroll deduction direct deposit saving. Among 
     registered voters surveyed, 83 percent of respondents said 
     they would be agreeable to having their employer offer to 
     sign them up for an IRA and allow them to contribute to it 
     through direct deposit of a small amount from their paycheck 
     to help them save for retirement. Similarly, 79 percent of 
     registered voters expressed support (and 54 percent expressed 
     ``strong'' support) for giving taxpayers the option to have 
     part of their income tax refund deposited into a retirement 
     savings account such as an IRA by just checking a box on 
     their tax return.
       In addition, the polling shows very strong support for a 
     requirement that goes far beyond our proposal, that every 
     company offer its employees some kind of retirement plan--
     such as a pension or 401(k), or at least an IRA to which 
     employees could contribute. Among registered voters surveyed 
     in August 2005, 77 percent supported such a requirement (and 
     59 percent responded that they were ``strongly'' in support). 
     As discussed, the approach described in this paper would not 
     require employers to offer their employees retirement plans, 
     but would give firms a financial incentive to offer their 
     employees access to payroll deduction as a convenient and 
     easy means of saving, and would require firms above a certain 
     size and maturity to extend this offer to their employees.


              the importance of protecting employer plans

       Employer-sponsored pension, profit-sharing, 401(k), and 
     other plans can be particularly effective--more so than 
     IRAs--in accumulating benefits for employees. As noted 
     earlier, the participation rate in 401(k)s, for example, 
     tends to range from two thirds to three quarters of eligible 
     employees, in contrast to IRAs, in which fewer than 1 in 
     10 eligible individuals participates. Employer plans tend 
     to be far more effective than IRAs at providing coverage 
     because of a number of attributes: for one thing, pension 
     and profit-sharing plans, for example, are funded by 
     employer contributions that automatically are made for the 
     benefit of eligible employees without requiring the 
     employee to take any initiative in order to participate. 
     Second, essentially all tax-qualified employer plans must 
     abide by standards that either seek to require reasonably 
     proportionate coverage of rank and-file workers or give 
     the employer a distinct incentive to encourage widespread 
     participation by employees. This encouragement typically 
     takes the form of both employer-provided retirement 
     savings education efforts and employer matching 
     contributions. The result is that the naturally eager 
     savers, who tend to be in the higher tax brackets, tend to 
     subsidize or bring along the naturally reluctant savers, 
     who often are in the lowest (including zero) tax brackets.
       Employer-sponsored retirement plans also have other 
     features that tend to make them effective in providing or 
     promoting coverage. As noted, the proposal outlined here 
     seeks to transplant some of these features to the IRA 
     universe. These include the automatic availability of a 
     saving vehicle, the use of payroll deduction (which continues 
     automatically once initiated), matching contributions 
     (further discussed below), professional investment 
     management, and peer group reinforcement of saving behavior.
       The automatic IRA must thus be designed carefully to avoid 
     competing with or crowding out employer plans and to avoid 
     encouraging firms to drop or reduce the employer 
     contributions that many make to plan participants. Owners and 
     others who control the decision whether to adopt or continue 
     maintaining a retirement plan for employees should continue 
     to have incentives to sponsor such plans. The ability to 
     offer employees direct deposit to IRAs should be designed so 
     that it will not prompt employers to drop, curtail, or 
     refrain from adopting retirement plans.
       Probably the single most important protection for employer 
     plans is to set maximum permitted contribution levels to the 
     automatic IRA so that they will be sufficient to meet the 
     demand for savings by most households but not high enough to 
     satisfy the appetite for tax-favored saving of business 
     owners or decision-makers. The average annual contribution to 
     a 401(k) plan by a nonhighly compensated employee is somewhat 
     greater than $2,000, and average annual 401(k) contributions 
     by employees generally tend to be on the order of 7 percent 
     of pay. A $3,000 contribution is 7.5 percent of pay for a 
     family earning $40,000, and 6 percent of pay for a family 
     earning $50,000.
       Yet IRA contribution limits are already higher than these 
     contribution levels. IRAs currently allow a married couple to 
     contribute up to $8,000 ($4,000 each) on a tax-favored basis, 
     and an additional $1,000 ($500 each) if they are age 50 or 
     older. By 2008, these figures are scheduled to rise to 
     $10,000 plus $2,000 ($1,000 each) for those age 50 or older. 
     These amounts--the current $9,000 a year for those age 50 and 
     over ($8,000 for others) and the post-2007 $12,000 annual 
     amount for those age 50 and over ($10,000 for others)--may 
     well be enough to satisfy the desire of many small-business 
     owners for tax-favored retirement savings. Even some small-
     business owners that might consider saving somewhat more than 
     $10,000 or $12,000 per year might well conclude that they are 
     better off not incurring the cost of making contributions and 
     providing a plan for their employees because the net benefit 
     to them of having a plan for employees is not greater than 
     the net benefit of simply saving through IRAs and giving 
     their employees access to IRAs.
       Accordingly, at the most, payroll deposit IRAs should not 
     permit contributions above the current IRA dollar limits, and 
     could be limited to a lower amount such as $3,000. (A 3% of 
     pay contribution would remain below $3,000 for employees 
     whose compensation did not exceed $100,000.) Imposing a lower 
     limit on the payroll deduction IRA would reduce to some 
     degree the risk that employees will exceed the maximum IRA 
     dollar contribution limit because of auto enrollment, 
     combined with possible other contributions to an IRA. That is 
     already a risk under current

[[Page S10301]]

     law, but the automatic nature of auto enrollment increases 
     the risk, especially if auto escalation is implemented. There 
     is a tradeoff between the desirability of limiting the 
     contribution amount (to mitigate both this risk and the risk 
     of competing with employer plans) and the simplicity of using 
     an existing vehicle (the IRA) ``as is''.
       In any event, the employee--not the employer--would be 
     responsible for monitoring any of all of their IRA 
     contributions to comply with the maximum limit (in part 
     because employees can contribute on their own and through 
     multiple employers). The ultimate reconciliation would be 
     made by the individual when filing the federal income tax 
     return.
       In addition, the automatic IRA should be designed to avoid 
     reducing ordinary employees' incentives to contribute to 
     employer-sponsored plans such as 401(k)s. If workers perceive 
     a program such as direct deposit savings to IRAs as a more 
     attractive destination for their contributions than an 
     employer-sponsored plan (for example, because of better 
     matching, tax treatment, investment options, or liquidity), 
     it could unfortunately divert employee contributions from 
     employer plans. This in turn could have a destabilizing 
     effect by making it difficult for employers to meet the 
     nondiscrimination standards applicable to 401(k)s and other 
     plans and therefore potentially discouraging employers from 
     continuing the plans or their contributions. While a detailed 
     discussion of these points is beyond the scope of this paper, 
     it is important to maintain a relationship between IRAs and 
     employer-sponsored retirement plans that preserves and 
     protects the employer plans.
     Automatic payroll deduction can promote marketing and 
         adoption of employer plans
       Our approach is designed not only to avoid causing any 
     reduction or contraction of employer plans, but actually to 
     promote expansion of employer plans. Consultants, third-party 
     administrators, financial institutions, and other plan 
     providers could be expected to view this proposal as 
     providing a valuable new opportunity to market 401(k)s, 
     SIMPLE-IRAs and other tax-favored retirement plans to 
     employers. Firms that, under this proposal, were about to 
     begin offering their employees payroll deduction saving or 
     had been offering their employees payroll deduction saving 
     for a year or two could be encouraged to ``trade up'' to an 
     actual plan such as a 401(k) or SIMPLE-IRA.
       Especially because these plans can now be purchased at very 
     low cost, it would seem natural for many small businesses to 
     graduate from payroll deduction savings and complete the 
     journey to a qualified plan in order to obtain the added 
     benefits in terms of recruitment, employee relations, and 
     larger tax-favored saving opportunities for owners and 
     managers.
       The following compares the maximum annual tax-favored 
     contribution levels for IRAs, SIMPLE-IRA plans and 401(k) 
     plans in effect for 2006:

------------------------------------------------------------------------
                                     IRA         SIMPLE-IRA     401(k)
------------------------------------------------------------------------
Under age 50.................  $4,000 per           $10,000      $15,000
                                spouse ($5,000
                                after 2007).
Age 50 and above.............  $4,500 per           $12,000      $20,000
                                spouse ($6,000
                                after 2007).
------------------------------------------------------------------------

       In addition, as noted, small employers that adopt a new 
     plan for the first time are entitled to a tax credit of up to 
     $500 each year for three years. As discussed, the proposed 
     tax credit for offering payroll deposit would be smaller, so 
     as to maintain the incentive for employers to go beyond the 
     payroll deduction or direct deposit IRA and adopt an actual 
     plan such as a SIMPLE, 401(k), or other employer plan.


               Encouraging Contributions by Nonemployees

       The payroll deposit system outlined thus far would not 
     automatically cover self-employed individuals, employees of 
     the smallest or newest businesses that are exempt from any 
     payroll deposit obligation, or certain unemployed individuals 
     who can save. A strategy centered on automatic arrangements 
     can also make it easier for these people to contribute to 
     IRAs.
     Encouraging automatic debit arrangements
       For individuals who are not employees or who otherwise lack 
     access to payroll deduction, automatic debit arrangements can 
     serve as a counterpart to automatic payroll deduction. 
     Automatic debit enables individuals to spread payments out 
     over time and to make payments on a regular and timely basis 
     by having them automatically charged to and deducted from an 
     account--such as a checking or savings account or credit 
     card--at regular intervals on a set schedule. The individual 
     generally gives advance authorization to the payer that 
     manages the account or the recipient of the payment, or both. 
     The key is that, as in the case of payroll deduction, once 
     the initial authorization has been given, regular payments 
     continue without requiring further initiative on the part of 
     the individual. For many consumers, automatic debit is a 
     convenient way to pay bills or make payments on mortgages or 
     other loans without having to remember to make each payment 
     when due and without having to write and mail checks.
       Similarly, as an element of an automatic IRA strategy, 
     automatic debit can facilitate saving while reducing 
     paperwork and cutting costs. For example, households can be 
     encouraged to sign up on-line for regular automatic debits to 
     a checking account or credit card that are directed to an IRA 
     or other saving vehicle. With on-line sign-up and monitoring, 
     steps can be taken to familiarize more households with 
     automatic debit arrangements and, via Internet websites and 
     otherwise, to make those arrangements easier to set up and 
     use as a mechanism for saving in IRAs.
     Facilitating automatic debit iras through professional or 
         trade associations
       Professional and trade associations could facilitate the 
     establishment of IRAs and the use of automatic debit and 
     direct deposit to the IRAs. Independent contractors and other 
     individuals who do not have an employer often belong to such 
     an association. The association, for example, might be able 
     to make saving easier for those members who wish to save by 
     making available convenient arrangements for automatic debit 
     of members' accounts. Association websites can make it easy 
     for members to sign up on line, monitor the automatic debit 
     savings, and make changes promptly when they wish to. 
     Although such associations generally lack the payroll-
     deduction mechanism that is available to employers, they can 
     help their members set up a pipeline involving regular 
     automatic deposits (online or by traditional means) from 
     their personal bank or other financial accounts to an IRA 
     established for them.
     Facilitating direct deposit of income tax refunds to IRAs
       Another major element of a strategy to encourage 
     contributions outside of employment would be to allow 
     taxpayers to deposit a portion of their income tax refunds 
     directly into an IRA by simply checking a box on their tax 
     returns.
       Currently, the IRS allows direct deposits of refunds to be 
     made to only one account. This all-or-nothing approach 
     discourages many households from saving any of the refund 
     because at least a portion of the refund is often needed for 
     immediate expenses. Allowing households instead to split 
     their refunds to deposit a portion directly into an IRA could 
     make saving simpler and, thus, more likely.
       The Bush administration has supported divisible refunds in 
     its last three budget documents; however, the necessary 
     administrative changes have yet to be implemented. Since 
     federal income tax refunds total nearly $230 billion a year 
     (more than twice the estimated annual aggregate amount of net 
     personal savings in the United States), even a modest 
     increase in the proportion of refunds saved every year could 
     bring about a significant increase in savings.
     Extending direct deposit to independent contractors
       Millions of Americans are self-employed as independent 
     contractors. Many of these workers receive regular payments 
     from firms, but because they are not employees, they are not 
     subject to income tax or payroll tax withholding. These 
     individuals might be included in the direct deposit system by 
     giving them the right to request that the firm receiving 
     their services direct deposit into an IRA a specified portion 
     from the compensation that would otherwise be paid to them.
       Compared to writing a large check to an IRA once a year, 
     this approach has several potential advantages to independent 
     contractors, which might well encourage them to save. These 
     include the ability to commit themselves to save a portion of 
     their compensation before they receive it (which, for some 
     people, makes the decision to defer consumption easier); the 
     ability to avoid having to make an affirmative choice among 
     various IRA providers; remittance of the funds by the firm by 
     direct deposit to the IRA; and, where payments are made to 
     the independent contractor on a regular basis, an arrangement 
     that, like regular payroll with holdings for employees, 
     automatically continues the pattern of saving through 
     repeated automatic payroll deductions unless and until the 
     individual elects to change.
       In many cases, the independent service provider will not 
     have a sufficient connection to a firm that receives the 
     services, or both the independent contractor and the firm 
     will be unwilling to enter into a payroll deposit type of 
     arrangement. In such instances, the independent contractor 
     could contribute to an IRA using automatic debit (as 
     discussed above) or by sending together with the estimated 
     taxes that generally are due four times a year.
     Matching deposits as a financial incentive
       A powerful financial incentive for direct deposit saving by 
     those who are not in the higher tax brackets (and who 
     therefore derive little benefit from a tax deduction or 
     exclusion) would be a matching deposit to their direct 
     deposit IRA. One means of delivering such a matching deposit 
     would be via the bank, mutual fund, insurance carrier, 
     brokerage firm, or other financial institution that provides 
     the direct deposit IRA. For example, the first $500 
     contributed to an IRA by an individual who is eligible to 
     make deductible contributions to an IRA might be

[[Page S10302]]

     matched by the private IRA provider on a dollar-for-dollar 
     basis, and the next $1,000 of contributions might be matched 
     at the rate of 50 cents on the dollar. The financial provider 
     would be reimbursed for its matching contributions through 
     federal income tax credits.
       Recent evidence from a randomized experiment involving 
     matched contributions to IRAs suggests that a simple matching 
     deposit to an IRA can make individuals significantly more 
     likely to contribute and more likely to contribute larger 
     amounts.
       Matching contributions--similar to those provided by most 
     401(k) plan sponsors--not only would help induce individuals 
     to contribute directly from their own pay, but also, if the 
     match were automatically deposited in the IRA, would add to 
     the amount saved in the IRA. The use of matching deposits, 
     however, would make it necessary to implement procedures 
     designed to prevent gaming--contributing to induce the 
     matching deposit, then quickly withdrawing those 
     contributions to retain the use of those funds. Among the 
     possible approaches would be to place matching deposits in a 
     separate subaccount subject to tight withdrawal rules and to 
     impose a financial penalty on early withdrawals of matched 
     contributions.
       American households have a compelling need to increase 
     their personal saving, especially for long-term needs such as 
     retirement. This paper proposes a strategy that would seek to 
     make saving more automatic--hence easier, more convenient, 
     and more likely to occur--largely by adapting to the IRA 
     universe practices and arrangements that have proven 
     successful in promoting 401(k) participation. In our view, 
     the automatic IRA approach outlined here holds considerable 
     promise of expanding retirement savings for millions of 
     workers.

  Mr. KERRY. Mr. President, I am pleased to join my colleagues Senators 
Smith, Conrad, and Bingaman in introducing the Women's Retirement 
Security Act of 2006. This legislation comes on the heels of the 
passage of the Pension Protection Act of 2006, which makes improvements 
to the defined benefit pension plan system.
  The legislation that we are introducing today builds upon that 
legislation and focuses on defined contribution plans. Our pension 
system has shifted away from defined benefit plans to defined 
contribution plans. We should make it easier for employers to offer 
defined contribution plans and for individuals to participate in these 
plans.
  At a time when we have a negative savings rate that is the lowest 
since the Great Depression, we should provide appropriate incentives to 
help individuals save for retirement. In an effort to achieve this, the 
Women's Retirement Security Act of 2006 focuses on increasing 
retirement savings, the preservation of income, equity in divorce, 
improving financial literacy, and encouraging small businesses to enter 
and remain in the employer retirement plan system.
  This legislation increases savings by allowing employees to 
contribute a portion of their paycheck to an individual retirement 
account (IRA) if their employer does not offer a pension plan. 
Automatic IRAs will help the 71 million workers that do not have 
employer-sponsored plans. It is a low-cost, sensible solution that 
provides a stepping stone toward employer-sponsored retirement plans. 
More workers are likely to contribute to an IRA if the contribution is 
deducted from their payroll. Automatic IRAs will help combat the 
inertia that is a factor in our low savings rate. The bill also 
provides a tax credit to help small businesses with the cost of 
implementation.
  Women are often placed at a disadvantage in our retirement system 
because they cycle in and out of the work force. The Women's Retirement 
Security Act of 2006 addresses this issue by requiring employers that 
offer defined contribution plans to cover part-time employees that meet 
specific requirements.
  Pension coverage needs to improve, particularly for small businesses. 
In 2004, only 26 percent of workers at firms with fewer than 25 
employees participated in pension plans. Progress has been made on 
providing coverage to small businesses. Currently, more than 19 million 
workers are covered by small business retirement plans, but more than 
36 million Americans work for firms with less than 25 employees.
  The Women's Retirement Security Act of 2006 provides a start-up 
credit for new small business retirement contributions. In addition, it 
removes rules that discourage small employers from adopting deferral 
only plans.
                                 ______