Small Companies May Have to Offer IRAs

The federal government proposes to mandate that small businesses automatically enroll workers who have shunned participation in 401(k) plans into p...
David McCannApril 11, 2013

Small companies could be required to set up individual retirement accounts funded by pre-tax deductions from participating employees’ pay, if the federal government gets its way. Several present and former finance chiefs contacted by CFO said they support the idea, though in some cases with reservations.

The fiscal-2014 federal budget plan unveiled on Wednesday includes a proposal to require that small employers – defined as those with less than $20 million in annual payroll – automatically enroll employees in an IRA, from which they could opt out. The measure would apply to companies that offer 401(k) programs and employees who don’t participate in those plans.

The purpose is to stimulate retirement savings through the automatic-enrollment feature. The budget proposal states, “About half of American workers have no workplace retirement plan. Yet fewer than 1 out of 10 workers who are eligible to make tax-favored contributions to an [IRA] actually do so, while nearly 9 out of 10 workers automatically enrolled in a 401(k) plan continue to make contributions.” Small companies would get tax credits to partially defray the costs of administering the new retirement-savings option.

Small-company CFOs interviewed for this article unanimously expressed strong concern for their employees’ retirement savings. “I’m in favor of any proposal that fosters more retirement savings,” says Hank Funsch, former longtime CFO and now president of Dayton T. Brown, a $40 million defense contractor. “Social Security will be challenged in the decades ahead and cannot remain the primary source of retirement income for younger generations. This proposal could help.”

But Funsch doesn’t give the government high marks overall. “I fear that in its search for more sources of revenue, Washington may attack the 401(k) concept by taking away the tax deduction for contributions so that the IRS gets the revenue now instead of after employees retire,” he says. He suggests the tax agency instead might allow Roth-like contributions – which are also taxed up front – through 401(k) plans.

Don Doherty, also a veteran CFO and now chief executive at Fleetwood Fixtures, a provider of fixtures for retail stores, says he is in favor of the proposal in theory only. Both he and Funsch say they can vouch for the idea that automatic enrollment greatly boosts 401(k) participation. But, says Doherty, “I am philosophically opposed to it being a government mandate or in any way regulated, since it will inevitably cost more than it needs to if done that way.”

If the rule is to be mandatory, Doherty would prefer that the government carve out a portion of the FICA tax and deposit it into an IRA-like plan on behalf of the employee. The funds would be placed in trust for the employee and inaccessible for general use by the federal government.

Kathleen Wolf, finance chief at Atari International Contracting, a small construction company, agrees that offering the IRA plan should be optional. “I think this is a good thing, because so many people have so little saved for retirement,” she says. “But forcing it is like adding another layer of Social Security.”

She also frowns at the costs small companies will incur. “It’s like when the minimum wage jumps. You have to balance that out with something. Generally speaking, it’s probably going to reduce someone’s compensation.”

To Paul Remington, who runs finance at document-management-software vendor Westbrook Technologies, the proposal “makes a lot of sense. Most employees will not miss the funds invested in their IRAs, but if they do they can opt out. It’s a great way to get individuals to save for retirement.”

But there are potential concerns for CFOs besides being forced to set up the plans and absorbing incremental costs. For one, they may be liable for mistakes made with regard to the plans.

The proposal as stated in the budget plan is silent on that count. In fact, formulating an opinion on the proposal’s worthiness isn’t yet feasible, says Gregory Marsh, vice president and corporate retirement plan consultant at Bridgehaven Financial Advisors, whose clients are mostly small and midsized companies.

“This proposal is very lacking in detail,” he says. “Funds will be deferred out of payroll to an investment vehicle, so there has to be a fiduciary. Who’s that going to be? The CFO? What happens, for example, if the company fails to automatically enroll someone who’s eligible to participate?”

Marsh says he’d rather see enhancements to law regarding 401(k) plans, like greater tax credits for companies that offer investment-education programs to employees. He also finds problematic that there are no laws at present governing employer-run IRA programs. “With 401(k) plans we have a strict existing body of law, ERISA [the Employee Retirement Income Security Act], that CFOs and others who make decisions on how to offer the plans must follow to make sure they don’t breach their fiduciary obligations,” he says.

It makes no sense, Marsh adds, to bog down CFOs or CEOs with more administrative activities when the new rule “would still not solve the savings crisis.” He notes that while the maximum annual contribution to an IRA is $5,500, the ceiling for a 401(k) plan is $17,500.