NCPA - National Center for Policy Analysis


August 15, 2006

Congress has made it easier for workers to prepare for retirement by passing the Pension Protection Act of 2006.  The most important and far-reaching features of the bill are provisions that encourage the expansion of such employer-sponsored retirement accounts as 401(k)s and 403(b)s, says Matt Moore, a senior fellow with the National Center for Policy Analysis.  These reforms are particularly important for younger and future workers.  As defined benefit plans dry up, 401(k) plans are becoming the norm. 

About a third of employees (32.8 percent) with access to a 401(k) don't contribute, according to a new survey by Hewitt Associates, a benefits consulting firm.  The participation rate is much worse among younger workers and those with lower incomes:

  • Almost three-quarters of 40- to 59-year-old employees participate (73.7 percent to 74.2 percent) versus less than half (47.5 percent) of those ages 29 and younger.
  • Almost all employees earning more than $100,000 participate (93 percent) versus just 39.1 percent of those earning less than $20,000.

This is understandable, says Moore.  Younger workers are more likely to earn lower wages, pay big student loan bills and carry large credit card debts.  Plus, the farther from retirement the more time there is to start saving. 

Younger workers cannot depend on Social Security and Medicare to the same extent as their parents and grandparents did to support them in retirement and must rely on their own savings to get through their golden years.  Automatic enrollment of new employees will help workers -- particularly younger workers -- build a nest egg for retirement.  Congress has acted.  Now it is up to employers to adopt the plan, says Moore. 

Source: Matt Moore, "Automatic 401(k)s: A Win for Workers," National Center for Policy Analysis, Brief Analysis No. 567, August 15, 2006.

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