Automatic IRAs could rely on government bonds as default investments for employees
Officials in the Obama administration are moving quickly to develop the investment infrastructure behind the president’s proposal for mandatory automatic enrollment in individual retirement accounts, which could be supported by the creation of Treasury-issued retirement bonds.
J. Mark Iwry, deputy assistant secretary for retirement and health policy at the Department of the Treasury, said that administration officials are exploring some “conservative” options for investing the assets of 78 million Americans that he estimates could be automatically enrolled in this “universal” workplace retirement system.
He said that officials have discussed the possibility of making a low-risk life-cycle or target date fund the default investment option for these auto-IRAs, which would be mandatory for employers if they don’t offer a retirement plan to their workers.
But there is also a chance that they could rely on a new form of bond — an “R bond” — as the basic building block for the auto-IRA, Mr. Iwry said in addressing reporters at the Treasury Department in Washington last week.
Administration officials are discussing the exact details of these R bonds, such as their interest rates, maturities and minimums, he noted. These bonds ideally would provide individuals with a source of secure, steady returns that would protect their initial investments.
There are two reasons in particular that R bonds could be an attractive default investment option for auto-IRAs, Mr. Iwry outlined.
For one, many of the individuals who would be automatically enrolled in these accounts could be people who had never saved for retirement, he noted. And if their auto-IRA assets are invested in a vehicle that could decline in value or at least fluctuate frequently, these workers may be discouraged from continuing to save, and could choose to opt out of the plan.
Using R bonds as the cornerstone for these accounts, however, could eliminate this volatility issue.
The bonds would also address a second potential problem in getting the auto-IRA program off the ground, Mr. Iwry explained.
Many of the auto-IRA accounts will be fairly small at first, a factor that could dissuade financial services providers — such as mutual fund companies and investment advisers — from wanting to manage these assets.
R bonds, Mr. Iwry said, could serve as the “training wheels” that would allow workers’ auto-IRAs to grow to the point where they would be more attractive to the financial services community. Essentially, these bonds would serve as the bridge between the public and private sectors in the auto-IRA program, he added.
Once workers established more substantial balances, then they could “graduate” to something more appropriate for a long-term retirement investment, such as a target date or life-cycle fund.
The administration, which included an auto-IRA provision in its 2010 budget, has gained some bipartisan support for the proposal, Mr. Iwry added. However, as more specific details of the program’s features come out — such as this initial investment infrastructure — opposition could well unfold.
Rep. Cathy McMorris Rodgers, R-Wash., for one, said last week that she’s concerned any such mandatory retirement proposal “would only lower choices for workers and reduce employers’ flexibility.”
Meanwhile, Sen. Robert Casey Jr., D-Pa., a member of the Health, Education, Labor and Pensions Committee, said that he needed more specific information before he could officially weigh in on the auto-IRA proposal.
Mark Bruno is a reporter at InvestmentNews, a sister publication of Pensions & Investments