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.