A new proposal in Congress would expand retirement savings opportunities for small business workers as well as gig workers and other independent contractors.
The bill would require employers with more than 10 employees that do not offer a retirement plan to automatically enroll their employees in individual retirement accounts or other automatic contribution plans or arrangements, such as 401(k) plans. The proposal, known as the Automatic IRA Act of 2024, was introduced by Democrat Richard Neal of Massachusetts.
The costs of the requirement to businesses are expected to be low because employers will qualify for the existing startup tax credit if they adopt a plan, or the proposed three-year automatic IRA tax credit of $500 if they adopt an automatic IRA.
According to the Insured Retirement Institute (IRI), nearly half of American workers work for companies that do not offer a traditional pension or retirement savings plan, while nearly two-thirds of those workers work for companies with 10 or more employees annuity providers and supported the proposed measure.
The proposal comes as several states have created IRA programs to try to build retirement savings for workers who don’t have plans through their workplaces. In seven states—California, Illinois, Oregon, Connecticut, Maryland, Colorado and Virginia—more than 800,000 workers have accumulated $1 billion in retirement savings through plans.
Read: In 2023, assets in state-managed IRAs reached $1 billion. Will you be contributing to one this year?
“It builds on proven policy solutions: 19 states have implemented state-based automatic IRA-for-all programs for private sector workers. The federal program will help ensure that workers’ path to retirement security no longer depends on their employer or state,” said Thasunda Brown Duckett, president and CEO of financial services company TIAA, in a letter of support for the proposal.
Under the proposed legislation, a default percentage of an employee’s wages would be diverted to the employee’s automatic IRA account. The minimum payment for the first year is 6%. Employees can increase or decrease their contribution percentage or opt out of the program altogether. Employees can choose to contribute to a traditional IRA or a Roth IRA; if no selection is made, the default is a Roth IRA.
The offer will only help those working for small businesses. This will expand savings opportunities for the 73.3 million American workers involved in the gig economy.
The legislation aims to make automatic IRAs available to non-employee service providers. This would include gig workers, self-employed individuals, freelancers, independent contractors and other non-employees.
The offer also allows for lifetime income option. Employers must offer employees with a retirement account balance of at least $200,000 the opportunity to share up to 50% of savings to purchase a lifetime income solution.
If passed, the law would apply to plan years beginning after 2026.
“The bill is a solution that will give workers, especially those working in small businesses, more opportunities to retire during their working years. It will also make protected, guaranteed lifetime income solutions that can provide steady income into an individual’s retirement years more accessible to help individuals secure long-term retirement security,” IRI said in a letter of support.
“The bill would significantly reduce the anxiety many workers and retirees feel about depleting their savings during retirement by requiring the plan to offer a lifetime income solution to its participants as a distribution option,” IRI said.
According to IRI, older workers are interested in having protected lifetime income solutions such as annuities embedded in defined contribution pension plans. In fact, 70% of workers between the ages of 40 and 45 said they were very or somewhat likely to allocate some of their retirement plan assets to annuities. Only 87% said that they believe that it is important to preserve the income from savings for life.