NCPA - National Center for Policy Analysis

PENSIONS IN A DIFFERENT LIGHT

August 22, 2006

The most potent change in the recently passed pension reform plan is the provision that smoothes the way for employers to automatically enroll workers in 401(k) plans, bump up their contributions, and put them in suitably aggressive investments to meet their retirement needs, says Pamela Yip, a business columnist with the Dallas Morning News.

Many companies had been holding off establishing automatic enrollment because of legal uncertainties, says Yip, but under the new law, companies receive "safe harbor" protections if their automatic enrollment programs provide:

  • Automatic employee contributions equal to at least 3 percent of pay in the first year, increasing 1 percent a year until reaching at least 6 percent of pay in the fourth year, up to a maximum of 10 percent.
  • A 100 percent employer match of the first 1 percent of employee deferrals to their 401(k) plan, plus a 50 percent match on additional deferrals, up to 6 percent.
  • Fully vested employer matches after two years.

At the same time, the safe-harbor provisions allow employers to put their workers' retirement money into riskier but higher-yielding stock and bond funds, or a more conservative blend of stocks and bonds as the employee gets closer to retirement.

The new measure will help workers who haven't participated in their employer's retirement plans, says Yip.

"For your rank-and-file worker, who is spending most of their time thinking about how they're going to get the kids to school, how they're going to pay their mortgage, they haven't had the time to think about a lot of the different investment options that are available to them," added Matt Moore, senior policy analyst at the National Center for Policy Analysis.

Source: Pamela Yip, Law makes significant changes to 401(k)s: Employers will soon see plans in a different light. So should you," Dallas Morning News, August 21, 2006

 

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