Two cheers for automatic IRA enrollment

Something must be done to encourage employees of small companies to save for retirement. As many as 78 million such workers aren’t saving for the future and ultimately will depend solely on Social Security for retirement income.

Those working at companies without retirement plans truly are on their own. Experience has shown that very few of these workers, even when told about the tax benefits of individual retirement accounts, take advantage of them.

Some workers have access to company-sponsored retirement plans but do not participate. For such workers, one solution may be automatic 401(k) plan enrollment.

For all employees, however, and especially those earning a low in-come, a benign nudging to save for retirement is a good thing.

As the findings of behavioral-finance studies indicate, most of us are victims of our own inertia and put off doing even what we know we should do.

For that reason, the Obama administration’s proposal for mandatory automatic-enrollment IRAs should not be dismissed. The proposal would require companies that did not offer workers access to a retirement plan to enroll their employees in a direct-deposit individual retirement account automatically. Employees could opt out, but most probably wouldn’t, assuming natural inertia.

Critics of the administration’s plan, such as the U.S. Chamber of Commerce in Washington, oppose the proposal because it would impose new requirements and costs on small businesses. And many investment advisers also oppose the idea, in part because of the administrative burden it might impose on their firms.

But critics should be careful. If they defeat a plan that imposes on small businesses a relatively light administrative burden and small costs — for which the proposal would provide tax relief — those critical of auto-enrollment may find the administration or the Democratic Congress turning to more onerous proposals.

Remember the 1981 universal pension plan recommended by Jimmy Carter’s Presidential Retirement Commission? It would have required all employers to offer defined benefit pension plans.

That proposal, which would have been far more onerous to businesses, was not acted upon, because the commission’s report and recommendation were released after Ronald Reagan had been elected.

Perhaps we can learn a lesson from our friends on the other side of the world.

More than a decade ago, the Australian government required all employers to contribute to a defined contribution plan for each worker. That contribution now stands at 9% of pay, a far more onerous mandate than what the administration has proposed for U.S. employers.

The Australian mandate boosted pension assets to among the top five in the world before the bear market, boosted the Australian savings rate and improved retirement security for Australian workers.

If employers in Australia, which has a less dynamic and flexible economy than the United States, can adapt to such a mandate, surely American employers can adapt to a less burdensome one.

The Obama administration’s plan does not require employers to make a contribution on behalf of employees — merely to enroll them in an IRA and deduct contributions from their pay. Even so, it could boost the nation’s savings rate and improve the retirement prospects for millions of workers.

Yes, it may impose some additional costs on employers, but no doubt the mutual fund and banking industry will develop platforms to minimize those expenses.

More details of the proposal need to be worked out, but employer groups should rethink their knee-jerk opposition and save their political capital so they can influence legislation that is likely to be far more burdensome.