Introduction of automatic enrollment for individual retirement accounts would improve retirement readiness especially for younger age cohorts so long as opt-outs were low and contributions were stepped up, according to new research released Tuesday by the Employee Benefit Research Institute.
Assuming no opt-opts and a 3% contribution rate, an auto IRA “would increase the probability of a ‘successful’ retirement by 8.4%,” as measured by EBRI’s retirement readiness ratings.
But a 3% contribution rate, the typical default rate of 401(k) plans, would not be enough to cover secure retirement income expectations, the study said. Doubling the employee contribution rate to 6% improves the retirement readiness rating by 15.2% for individuals in the youngest cohort, who would have the longest time to benefit from such a program, and for those working for the smallest employers, according to the study, “EBRI Notes; Auto-IRAs: How Much Would They Increase the Probability of ‘Successful’ Retirements and Decrease Retirement Deficits? Preliminary Evidence from EBRI’s Retirement Security Projection Model.”
Even in the study’s worst-case scenario of a 75% opt-out rate, the retirement readiness rating improved, “albeit only 2.2% for those working for small employers.”
Because most individuals without access to a workplace retirement plan don’t take advantage of an IRA, the Obama administration’s current proposed budget includes such a program, while in Congress the proposed Automatic IRA Act was introduced earlier this year by Sen. Sheldon Whitehouse, D-R.I., as S.245 in the Senate and by Rep. Richard Neal, D-Mass, as H.R.506, in the House of Representatives, the study said.