The automatic IRA would feature direct payroll deposits to a low-cost, diversified individual retirement account.  Most American employees not covered by an employer-sponsored retirement plan would be offered the opportunity to save through the powerful mechanism of regular payroll deposits that continue automatically (an opportunity now limited mostly to 401(k)-eligible workers).

Employers that do not provide plans for all of their employees could claim a temporary tax credit if they made regular payroll deposit available to those employees who are not eligible for a plan. Firms above a certain size (e.g., ten employees) that have been in business for at least two years but that still do not sponsor any plan for their employees would be called upon to offer employees this payroll-deduction saving option. Other employers that do not sponsor a plan also would receive the tax credit if they offered payroll deduction saving.

The firm would inform employees of the automatic IRA (payroll-deduction saving) option, and elicit from each employee a decision either to participate or to opt out.  For most employees, the payroll deductions would be made by direct deposit similar to the very common direct deposit of paychecks to employees’ accounts at their financial institutions.[3] 

To maximize participation, employers would be encouraged to use automatic enrollment (whereby employees automatically participate at a statutorily specified rate of contribution unless they opt out). As an incentive, employers using auto enrollment to promote participation in direct deposit IRAs would not be required to obtain responses from unresponsive employees.  Evidence from the 401(k) universe strongly suggests that high levels of participation tend to result not only from autoenrollment but also from the practice of eliciting from each eligible individual an explicit decision to participate or to opt out.

Employers making direct deposit or payroll deduction available would be protected from potential fiduciary liability and from having to choose or arrange Default investments. Instead, diversified default investments and a handful of standard, low-cost investment alternatives would be specified by statute and regulation. Payroll deduction contributions would be transferred, at the employer’s option, to a central repository, which would remit them to IRAs designated by employees or, absent employee designation, to a default collective retirement account.

Investment management as well as record keeping and other administrative functions would be contracted to private sector financial institutions to the fullest extent practicable. Costs would be minimized through a no-frills design, economies of scale, and maximum use of electronic technologies. Once accounts reached a predetermined balance (e.g., $15,000) sufficient to make them sufficiently profitable to attract the interest of the full range of IRA providers, account owners would have the option to transfer them to IRAs of their choosing.