Most investors are familiar with the types of retirement accounts available to them. Maybe you invest in a 401(k) through work. Maybe you tuck money aside in a Roth IRA every month. Whatever type of retirement account you decide to use, they all have one thing in common: they are opt-in. It's up to you whether or not you invest. For some people, however, knowing that they have the option of investing is simply not enough – they need someone to nudge them toward saving. (Be sure to consider the tax benefits and the eligibility requirements of the Roth IRA; see Roth IRA: Back To Basics.)

A Failure To Plan

While many Americans put money aside every month for their future retirement, a lot of people simply don't plan well for their futures. They underestimate the amount of money they'll need in retirement, rely solely on Social Security benefits or tell themselves that they will start investing soon, but not right now. A significant portion of Americans either have no savings or have savings that won't last them through retirement. (Find out everything you need to know about Social Security and whether it will benefit you in 10 Common Questions About Social Security.)

Times Are Changing

A new type of account is on the horizon: the opt-out IRA. Introduced by President Barack Obama, the opt-out IRA is designed to help investors who might not have a 401(k) or other retirement option available through their work, and who might have a hard time getting motivated to save on their own.

Opt-Out Versus Opt-In

What makes the opt-out retirement account a novel concept is that it takes into account a little quirk about human behavior: If people are given the option to open an investment account or to maintain the status quo, they are more likely not to make the change. If you flip the idea around and require someone to opt out, they are more likely to keep the status quo and keep investing. The plan seeks to overcome the inertia and hesitation that many Americans face when it comes to saving.

The Pension Protection Act of 2006, signed into law by President George W. Bush, allowed employers to automatically enroll their employees in a company's retirement plan. The new proposal would extend this option to employers who do not have a company retirement plan, such as a 401(k), to automatically enroll its employees into an IRA. A base level of the employee's salary would be deducted each month and placed into the IRA, with the employee having the ability to adjust how much is contributed or opt out of the plan altogether.

Employees More Likely To Invest

The proposal makes businesses without their own retirement plans seem more attractive to employees looking to have a portion of their salaries invested for them, and is more likely to get employees to invest because it is an opt-out rather than an opt-in plan. By having the retirement account set up through work, employees are also able to bypass the vast amount of retirement plan choices that are floating around.

Opt-Out Plan Accomplishes Two Major Objectives

By increasing the likelihood of someone saving, the government is accomplishing two major objectives. First, it is getting people to create a cushion for their retirement, which is likely to make many citizens feel less stressed about their future, as well as reducing the need to work well past the typical retirement age. Second, it reduces the potential burden on the taxpayer caused by older Americans who have not saved enough for when they no longer work. The proposal has the added benefit of not creating division within Congress: both sides of the aisle seem to be in agreement that Americans need a simpler way to save for retirement.

We'll show you how to set yourself up to retire in style. Check out Saving For Retirement: The Quest For Success.

Related Articles
  1. Mutual Funds & ETFs

    What Target-Date Funds Can Teach About Investing

    Target-date funds are a popular way to invest for retirement. Here's what they can teach the novice investor.
  2. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  3. Professionals

    How to Protect Retirement and Help Adult Kids

    Parents can both protect their retirement money and help their adult kids. Here's how.
  4. Retirement

    10 Ways to Save Your Retirement: It's Not Too Late

    It's not too late to start saving for your retirement, even if you took longer to start thinking about it and doing something about it.
  5. Investing

    10 Ways to Effectively Save for the Future

    Savings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
  6. Professionals

    How to Protect Your Portfolio from a Market Crash

    Although market crashes are usually bad news for your portfolio, there are several ways to minimize losses or even profit outright from market movement.
  7. Retirement

    How Robo-Advisors Can Help You and Your Portfolio

    Robo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
  8. Professionals

    3 Benefits of Working Longer (and Retiring Later)

    There are many reasons why folks in their 60s may want to keep working until at least age 70. Here are three.
  9. Retirement

    How Are 401(k) Withdrawals Taxed for Nonresidents?

    As a U.S. nonresident, deciding what to do with your 401(k) after you return home comes down to which tax penalties, if any, you're willing to incur.
  10. Retirement

    Why Are Annuities Important for Retirement?

    Understand how annuities work, and identify the benefits they provide for retirement, the most salient being a guaranteed income stream for life.
  1. How can I determine if a longevity annuity is right for me?

    A longevity annuity may be right for an individual if, based on his current health and a family history of longevity, he ... Read Full Answer >>
  2. How does a Roth IRA grow over time?

    Your Roth IRA account grows over time thanks to two funding sources: contributions and earnings. While your contributions ... Read Full Answer >>
  3. Can my 401(k) be seized or garnished?

    As long as your retirement funds are held in your 401(k) and you do not take them as distributions, your 401(k) cannot be ... Read Full Answer >>
  4. Can my IRA be taken in a lawsuit?

    Whether your IRA can be taken in a lawsuit depends largely on your state of residence and the judgment in question. There ... Read Full Answer >>
  5. Are mutual funds considered retirement accounts?

    Unlike a 401(k) or Individual Retirement Account (IRA), mutual funds are not classified as retirement accounts. Employers ... Read Full Answer >>
  6. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!