There is proposed legislation that would require any business with more than 10 workers to provide an employer-sponsored IRA (Individual Retirement Account) to employees.
The legislation also includes an automatic deduction of wages to go into the plan. Employees can then opt to increase or decrease the amount that is deducted. When a certain amount is accumulated, the funds are rolled over into a target fund, based on retirement date.
The theory behind the requirement is that many employees do not plan appropriately for their retirement and fall very short in their savings when they retire.
While I agree we need measures to get people to save wisely for retirement, I'm concerned of the burden this will place on small businesses that do not currently offer a plan.
If companies are currently using an outside vendor for payroll, this will probably only be a small additional administrative expense.
But the communications necessary to accompany a 401(k) offering can be substantial.
If an employer is going to be the plan sponsor, it has the responsibility to provide training and education on how best to save and invest. There are enrollment materials to be produced and there has to be some kind of internal administration for new hires, terminations, etc.
My experience with automatic deductions is that many employees do not understand that a 2 or 3 percent automatic deduction will not keep up with the rate of inflation and will not help them reach an appropriate savings retirement goal.
Employees need to understand how much to save. Without the communication, employees can be lulled into thinking this is all they need to do to be prepared.
This expense could outweigh the employer tax benefits, if applicable with this type of plan.
Maybe a mandate is not the way to go on this.
Perhaps more business incentives to encourage employers to offer a savings plan would be the more responsible approach.