Washington — LIKE nearly half the American workforce, Pierre Randolph has no pension or 401(k) plan to look forward to in old age.

Nonetheless, the 44-year-old maintenance worker is cultivating a retirement nest egg with the aid of his employer, outside the traditional pension system and the rules that govern it.

“These days, you don’t have a retirement plan unless you make a retirement plan,” said Randolph, whose employer deposits his annual raise into an individual retirement account. “If you don’t save for it, you won’t have it.”

Plans such as Randolph’s could become more widespread under various legislative proposals to address a gaping hole in the nation’s safety net for financial security in retirement. The idea is for employers to deposit money from a paycheck straight into a special account, in some cases before it is taxed, and before workers have a chance to spend it.

The approach could generate savings for many of the 71 million Americans who have no workplace retirement plan. Advocates say it would cost employers little, though some employer groups are wary.

Regardless, the idea is finding support in both major political parties, which for decades have warred over retirement security issues.

“There’s very strong interest in this proposal from Republicans and Democrats, from many liberal congressional offices, from many conservative congressional offices,” said David C. John, a scholar at the conservative Heritage Foundation. “This is one issue where we are able to work together.”

Tom Borger, who employs Randolph, began pushing his own version of the idea about 10 years ago.

Borger owns a firm that manages properties in the Washington area and wanted to help his staff of painters, maintenance people and others save for retirement. Many earn just $20,000 to $30,000 a year.

Like many smaller employers, he did not want to set up a pension plan that would be subject to all the funding rules of the Employee Retirement Income Security Act. He also knew that few of the workers were launching their own retirement accounts.

“For them to say, ‘It’s April 14, I’m going to write a check for $2,000 for my IRA,’ it doesn’t happen,” Borger said. “They’re living paycheck to paycheck.”

To help, he offered to put the additional money each employee earned as a result of annual raises directly into an IRA that the worker would own and control. To keep it simple, he decided to make lump sum deposits once a year.

“For some of these people it’s the only savings they’ve ever had,” Borger said.

To make such benefits more available, John of the Heritage Foundation has crafted a plan with Mark Iwry from the moderate Brookings Institution, with whom John had clashed over proposals for Social Security. The fruit of their unusual collaboration is the “automatic IRA,” which would require companies to offer employees the chance to make a direct deposit into an IRA. The proposal is aimed at workers whose employers don’t provide them with retirement benefits.

With traditional IRAs, a worker each year can set aside as much as $4,000 in pretax earnings a year. The income tax on such contributions and on any money earned by investing the funds in the IRA is deferred until the money is withdrawn at retirement. The difference with the “automatic IRA” would be that the employee wouldn’t have to come up with the cash to make a contribution.

The idea has sparked interest at the highest levels, said Iwry, a former pension official at the U.S. Treasury under President Clinton.

“We’ve had no fewer than five separate requests for briefings from the [Bush] administration,” he said, ” … which we were more than happy to have with them.”

Unlike President Bush’s ill-fated plan to shift some Social Security money into private accounts, the savings idea is not immediately polarizing. Conservatives can say that it promotes personal investment and responsibility, while liberals can view the measure as a means of helping workplace have-nots. The 38-million-member AARP is supportive of the proposal.

Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, plans to introduce a version of the Savings Competitiveness Act he sponsored last year, which included a payroll deduction feature and emphasized IRAs, according to his staff.

In a more radical proposal, Sen. Jeff Sessions (R-Ala.) is urging that the government provide every American with a $1,000 long-term savings fund at birth. After people enter the workforce, employers would automatically deposit 1% of the paycheck into special accounts and toss in their own 1% match.

The approach could boost the nation’s paltry savings rate and yield many workers nest eggs worth half a million dollars, Sessions believes. “That is possible, realistic, so easily within our grasp if we set forth the right plans today,” he told colleagues on the Senate floor.

Randolph, the maintenance worker and a widowed father of two adult children, has built a modest nest egg of about $25,000 under Borger’s program. He says he views it as an increasingly important part of his foundation for the future.

“My own thought is this is a good way that I can honestly save some money — knowing I can’t touch it,” he said. He recalled a worker who never saved a dime and came to an unhappy end, “in a nursing home with no one to care for him — basically a ward of the state,” said Randolph. “I don’t want to end up that way.”

Wanda Scrivner, manager of the brick building where Randolph works in a neighborhood just a few miles from the White House, is also participating in the automatic deposit program and is grateful for it.

She said that she burned through $40,000 in retirement savings she received in a one-time distribution after she left a previous job. “It was like turning a child loose in a candy store.”

Under Iwry’s and John’s automatic IRA proposal, employers that don’t offer pensions or 401(k)s would be required to give workers a chance to have a portion of their pay deposited directly into an IRA. To help cover paperwork costs, firms would get tax credits (perhaps $250 a year initially). Companies with 10 or fewer workers would be exempt.

John and Iwry unveiled the outlines of their plan a year ago. Even before they had worked out all the technical kinks, members of Congress were asking to sponsor legislation. Supporters are hoping that the momentum will build — and soon.

Sens. Jeff Bingaman (D-N.M.) and Gordon H. Smith (R-Ore.), last week introduced legislation to promote such savings, and Reps. Richard E. Neal (D-Mass.) and Philip S. English (R-Pa.) are expected to introduce a House version this week. Supporters said employer costs would be negligible once the system was up and running, despite claims that some companies might find it inconvenient to get their programs launched.

The plan’s backers take heart in a recent statement by a U.S. Chamber of Commerce-sponsored panel that payroll savings for retirement should be encouraged in the workplace.

Some employer groups take a dimmer view of the initiative. They contend that the government should not meddle with their payrolls beyond existing requirements, and they fear that a new mandate could open the door to increasingly costly rules in the future.

Automatic payroll deductions might seem simple, but they can be a burden for small firms that do their own accounting, according to the National Federation of Independent Business, a trade group. Among companies with fewer than 250 workers, an estimated 43% do not even offer direct deposit of payroll checks, the federation says.

“Fundamentally our members are opposed to mandates,” said Macey Davis, the federation’s tax counsel. “They don’t feel they should be told how to spend their hard-earned money and who they should spend it on.”

Architects of the automatic IRA say critics are exaggerating the burden it would create. They note that last year’s Pension Protection Act encourages employers to automatically enroll workers in 401(k) plans. Creating a savings vehicle for the 40 million workers who don’t have retirement plans is even more critical, they say.

“Even if we get 10% of them — and we’re hoping to do much better than that — it’s a start,” John said. “It’s a move in the right direction.”

By Jonathan Peterson
Los Angeles Times Times Staff Writer
April 22, 2007

These savings and debt guidelines – put together by Charles Farrell, a financial consultant in Medina, Ohio – sometimes generate howls of outrage. But they offer a much-needed reality check, especially for folks who are piling on the mortgage debt so they can play in today’s overheated housing market.

The numbers tell you how much retirement savings and how much debt you should have, relative to your income, at different ages. Suppose you are 45 and hauling in $70,000 in annual income.

According to the tables, you ought to have $210,000 saved for retirement (3.0 times $70,000) and just $70,000 of debt (1.0 times $70,000). Are you hitting these targets? Probably not. Should you strive to catch up? You’d better believe it.

Taking aim

“I use the tables with clients to see if they’re behind the 8 ball,” explains Farrell, who specializes in advising individuals and corporations on retirement issues. “Are people a bit surprised by the ratios? Yeah, they’re surprised. It can be a tough pill to swallow.”

For instance, if you are 30, the tables recommend limiting your total debt, including mortgage debt, to 1.7 times income. That is a lofty goal, especially if you live in a major city on the East or West coast, where most people have to borrow heavily to buy even a half-decent house.

Similarly, if you are 65 and about to quit the work force, the tables indicate your nest egg should be equal to 12 times income. To many people, that will seem like an impossibly large sum.

Measuring up

But before you dismiss the tables’ targets as absurdly draconian, I have bad news. If anything, the targets aren’t stringent enough. The reason: Underpinning the ratios are three key assumptions – and all three might be a tad optimistic.

First, Farrell assumes your retirement savings will earn roughly 5 percentage points a year more than inflation. You may have a tough time notching that sort of return, given today’s rich stock- market valuations, skimpy bond yields and the drag from investment costs.

Second, Farrell assumes you will sock away about 12 percent of your pretax income for retirement every year from age 30 to 65. If your employer contributes 3 percent of your salary to your 401-k plan, that would reduce your share to 9 percent. Your required annual savings would also be lower if you expect to receive a traditional company pension.

Still, let’s be realistic: With the official savings rate hovering at about 1 percent, most folks – even with their employer’s help – aren’t saving anything like 12 percent.

Finally, Farrell might also be a little too generous when it comes to retirement withdrawals. Today, many financial experts advise retirees to withdraw just 4 percent or 4.5 percent of their portfolio’s value during the first year of retirement and thereafter to step up their annual withdrawals along with inflation. Farrell, however, assumes a 5 percent withdrawal rate.

Suppose you and your spouse earned $80,000 in your final working year and retire with 12 times that sum, or $960,000. A 5 percent withdrawal rate would give you $48,000 in the first year of retirement, or 60 percent of your preretirement income. “Thrown some Social Security, and the typical retiree would be up around 80 percent” of his or her preretirement income, Farrell figures.

Catching up

Wouldn’t mind having that sort of retirement income? My advice: Stick close to the tables’ targets – or you could find yourself in a heap of trouble.

Let’s say you are 40 and your family income is $100,000. The tables say you should have $125,000 in debt (1.25 times your income) and $180,000 of retirement savings (1.8 times your income). But instead, enamored by today’s highflying real-estate market, you have plunked for the big house, leaving you with a whopping $300,000 of mortgage debt and just $50,000 in retirement savings.

Suddenly, the math gets really ugly. To get back on track, so you can retire with a portfolio big enough to generate 60 percent of your preretirement income, Farrell figures you would need to sock away 20 percent of your pretax income every year for the next 25 or 26 years. Hitting that savings target would be all but impossible, because mortgage payments and taxes would likely consume more than 40 percent of your income.

“There is a fundamental relationship between what you earn, how much debt you have and what you can afford to save,” Farrell says. “If you’re servicing too much debt, you can’t hit your savings target.”

Real-estate junkies might respond that, come 65, they can cash out some of their home equity and retire in style. That strikes me as a dubious strategy, for two reasons.

First, it assumes that today’s real-estate market will keep soaring. Second, even if home prices hold up, these folks have severely crimped their ability to save, because real estate is devouring so much of their income. After all, the big house means not only big mortgage payments, but also maintenance expenses, property taxes and homeowner’s insurance.

Got far more debt than the tables suggest – and far less savings? There are ways to straighten out the mess, but the choices aren’t pleasant.

“Maybe you should trade down earlier,” Farrell says. “Maybe you need to delay retirement. Maybe you should talk to the kids about taking out loans for college. Maybe, if one spouse doesn’t work, it’s time to get a part-time job and then sock away all of that extra income.”

By JONATHAN CLEMENTS
The Wall Street Journal
Sunday, April 24, 2005