Obama’s automatic IRA

Just about all parents tell the same war stories from childhood: “When I was your age, I had to walk two miles – in 3 feet of snow — to get to school.” Or, “When I was your age, we had only one TV in the house.” But pretty soon, parents may add this one, [...]

Just about all parents tell the same war stories from childhood: “When I was your age, I had to walk two miles – in 3 feet of snow — to get to school.” Or, “When I was your age, we had only one TV in the house.” But pretty soon, parents may add this one, too: “When I was your age, I didn’t have an IRA.”

The Obama administration wants to stop that story in its tracks.

IRAs, along with 401(k)s, didn’t exist until the mid-1970s. But after 30-plus years, the plans still are not ubiquitous. As Time magazine columnist Justin Fox points out in his blog post, only 57.7% of U.S. workers have some kind of retirement plan. The rest are counting on other savings and/or Social Security.

And that’s a problem, because according to the latest data from the Employee Benefit Research Institute, half of workers ages 55 and older have less than $50,000 saved. The bear market isn’t helping. From the start of 2008 through the first four months of this year, 401(k) account balances for workers ages 55 to 64 fell an average of 10% to 20%.

Obama’s plan for IRAs does not make the accounts universal. Instead, it targets employers that don’t offer a retirement plan to workers. But like Social Security, the benefit would be automatic. If workers aren’t given a 401(k) or similar option, then their employer must automatically open an IRA on their behalf and make contributions through direct deposit, pulling the cash from the workers’ paycheck. Employees who don’t want to participate could opt out.

Critics claim such a plan would A) be too expensive, B) help turn the U.S. into a “nanny state,” and C) be too burdensome for small businesses.

But it’s also hard to argue against a program (any program) that would help people build some retirement security. You can’t rely on employer contributions for it: Just consider the number of companies that cut their 401(k) match this year. Individuals aren’t dependable, either.

And even as dramatic as Obama’s proposal seems, it doesn’t cover everyone. A growing number of company 401(k) plans have an automatic enrollment feature, but not all do.

We already have too many choices to make: How to invest our account, when to rebalance and how much to draw down, for example. Automatic IRAs and 401(k)s could take one decision off the table — and save future generations from hearing yet another story that starts, “When I was your age…”