Self-Directed IRA Investing

There is movement afoot in Washington, as a result of the current low savings rate, social security concern, and inevitable problem when the majority of the population runs out of funds during retirement and the status quo is not changed, to create an “Automatic IRA”.  In May, I had the opportunity to meet the author of this proposed new retirement vehicle and the creator of the SIMPLE IRA, Mark Iwry (Deputy Treasury Secretary to Tim Geitner), to hear his views and to discuss ways to make his idea more attractive to employers, employees, and service providers.  The results of those discussions lead to the Retirement Industry Trust Association’s input on how to make the Automatic IRA a more attractive and effective savings and retirement vehcle.

No one can argue that it is not a good idea to increase savings in the U.S, where debt (consumer, business, and Federal) has fueled both recent growth and collapse.  While the savings rate appears to be heading upward recently, it is a likely temporal trend as people liquefy their investments for fear of the future.  Once there is more clarity in the direction of the economy, no doubt much of these “savings” will be redeployed to investment markets.  So more is needed to encouraged people to save for their future, as statistics don’t lie.
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The personal savings rate more than doubled immediately following the beginning of the current recession in August of 2008 and peaked at 5% in the first quarter of 2009.  However, it has been declining ever since.  No doubt much of this trend is not voulunary with unemployment rates surging to 9.5%, however, there is nothing to indicate that rates will rise again when the economy gets back on solid footing; and, the fact is, that the U.S. has had and continues to have one of the lowest rates of all developed countries. Specifically, when considering Government debt, the U.S. savings rate turned negative for the first time since the Great Depression, in 2009, and the gap is widening even as households and companies attempt to put away more money than ever before. Moreover, many Americans were ill-prepared for the recent downturn, and were forced to cash-out their savings, including their retirement accounts, making their financial future even more cloudy.   As a result, the saving rate reached the lowest levels since the Department of Commerce started measuring it in 1947 by the third quarter of 2009.

So “what to do”, is much on the minds of those in Washington, and thus emerges the proposed “Automatic IRA”.  First, what is an Automatic IRA?  Essentially, it is an opt-out (you get one unless you overtly decline) retirement vehicle that would be offered by most employers (those with more than 10 employees), that didn’t otherwise offer a retirement plan for their employees.  This would be a legal requirement for the employer, however, it is expected that, in most cases, there would be little or no cost to the employer, especially those using an automated payroll service.  That’s because this would just be another deduction from the employee’s paycheck, and once the paperwork was done, it would theoretically be relatively painless and cost-free for the employer.  With small payroll deposits, however, it is likely that investment options for the employee would be limited to money market accounts, until the employee accumulated enough to allow other options.  Otherwise, and immediate savings would be likely eaten up by fees.  Certain organizations and institutions, however, are drooling over the potential to receive these new deposits for use in their investment programs (e.g., larger mutual fund companies, and groups like the AARP).  But will the Automatic IRA really help the employee or just become another way for Wall Street to make money?  There are too many pro-con issues to answer this question in this blog, so I will touch on some of the considerations.

1) Should the Government continue to tell employers how to run their businesses and what to offer their employees in terms of benefits?

2) How will this product be different from Social Security which is already deducted from payroll?

3) Will employees, particularly in this tough economic environment, realy adopt this product or opt-out?

4) How will the product be developed so that it is profitable for investment sponsors and IRA custodians, while also not becoming an administrative burden for employers?

5) If it is designed so that sponsors and custodians can at least offer it at break-even initially, will those costs still be too high to encourage employees to make deposits?

6) What happens when the employee changes jobs and moves to a company that is not required to offer the product?

7) Will the employee be able to tap their account in an economic emergency?

etc., etc.

As the President of the Retirement Industry Trust Association (RITA), I recently had the opportunity to work with other members of our asssociation, after discussions with members of the Administration and the House and Senate, to develop suggestions on the issues above related to the Automatic IRA, and then to submit them to the proponents.  All of our suggestions were aimed at allowing the Automatic IRA to gain some practical traction, so that it will be able to accomplish its intended purpose-to increase savings in the U.S.  There is nothing to say that all or any of our suggestions will make their way into the retirement vehicle or even whether the Automatic IRA should or will ever become a reality.  But RITA offered its best shot in its attempt to help the Automatic IRA succeed to increase savings, and we can all stay tuned to see what happens!