Here’s some late-breaking news: John McCain and Barack Obama agree on something.

I stumbled across this startling information while reporting on a proposal making the rounds in Washington aimed at creating new retirement saving options for lower-income Americans.

Called the Automatic IRA, it could keep millions of Americans out of poverty in old age. It gets at one of the toughest challenges to retirement saving–the simple fact that half of the country’s working population doesn’t have access to a workplace retirement savings plan.

The Automatic IRA concept enjoys bi-partisan support. It proposes creation of a new retirement savings vehicle for the 75 million Americans who don’t have access to 401(k) plans where they work. That’s because they work for employers–mostly small businesses–that don’t sponsor 401(k) plans, mainly due to the expense of administering and matching contributions.

A number of retirement policy experts believe the solution lies in creating a public-private IRA option for these workers–a defined contribution cousin to the Social Security system.

Several proposals are floating around but one of the most interesting is the Automatic IRA plan proposed by a group called the Retirement Security Project (RSP). It’s a non-partisan organization whose principals include two of the nation’s top experts on retirement policy–J. Mark Iwry of the (liberal) Brookings Institution and David C. John of the (conservative) Heritage Foundation.

Iwry was a key retirement benefits official in the U.S. Department of the Treasury during the Clinton Administration, and he is an advisor to the Obama campaign on retirement policy issues.

Obama endorsed the Automatic IRA in the fall of 2007; McCain endorsed it earlier this month in the course of responding to a questionnaire from a group of business and trade groups focused on employee benefits.

McCain said Automatic IRAs are “a natural way to achieve” the goal of giving all workers an easy way to save for retirement without displacing existing retirement vehicles, such as pensions.

Here’s how the Automatic IRA would work. Companies that are not willing to sponsor any retirement plan, have been in business for more than two years and have more than 10 employees would be mandated to offer a payroll-deduction saving option to their employees–no different from the way employers deduct for taxes. Employees would be enrolled automatically when they are hired, unless they chose to opt out.

Although the word “mandate” often is used as a political weapon, the truth is this plan would be fairly painless for employers. They wouldn’t have to make matching contributions, or comply with the plan qualification and fiduciary standards required in employer-sponsored plans. The employer simply acts as a conduit, remitting the deducted pay to an IRA account.

“It’s clear we need to do something different,” says Iwry. “We’re not saying the answer is a major government role, but rather a minimal government intervention that pays huge potential dividends in expanding coverage.”

Another Retirement Security Project proposal would complement the Automatic IRA by changing the current Savers Tax credit to make it refundable. The current credit offers a non-refundable credit up to $2,000 for lower- and moderate-income married couples for contributions to an employer plan or IRA. But that has value only if you have an income tax liability. The RSP plan would be refundable and added directly to the saver’s retirement account, so it would help even those who owe no income tax.

The RSP proposals embrace a model of simplicity to encourage participation and positive investment outcomes; most experts point to the complexity of most retirement plans as a major barrier to saving. “When people are confronted with too many choices they tend to react like a deer in the headlights,” says Iwry. “They either freeze and shy away from participating at all, or resort to simple rules of thumb that aren’t rational.”

The RSP Automatic IRA would put savers in a default investment, such as a lifecycle fund geared to the individual’s expected retirement age, with two or three simple alternative investment options for those who decided to opt out. The automatic IRA would probably default savers into Roth IRAs rather than traditional IRAs, since most of the targeted savers are in low tax brackets.

The RSP also is proposing that 401(k) plan sponsors be encouraged to automatically offer to convert at least some portion of each account into a simple annuity upon retirement, unless the saver specifically opts out.

The annuity market has traditionally been burdened by lack of transparency and high fees. That’s unfortunate; converting retirement savings into a lifetime guaranteed income stream is a great way to provide long-term retirement security and a great way to “insure” against rising longevity.

Iwry sees the RSP proposal as a way to bring annuities into their own. He also notes that the automatic IRA proposal could serve as a platform for large-scale annuitization: “If tens of millions of retirement savers are using a similar format, there are potentially tremendous benefits in economies of scale and standardization,” he says.

Overall, Iwry and John estimate that 50 million families could benefit from the RSP proposals.

It’s amazing what can get done when we reach across the aisle.

Tags | 401(k), IRA, planning, public policy