NCPA - National Center for Policy Analysis

FUTURE OF 401(K) IS AUTOMATIC

October 2, 2006

As traditional corporate pensions continue to dry up, the federal government is trying to make Americans' personal saving for retirement more automatic.  Congress recently passed legislation encouraging employers to automatically enroll workers in 401(k) plans, and last week the Labor Department proposed rules to implement the law.

Some personal finance experts differ on the appropriateness of the rules, in particular the types of default investments that workers' money would go into.  But what's clear is that automatic enrollment is the way of the future.

For workers who don't have employee retirement plans, legislation has been introduced in Congress to create an "automatic IRA." 

  • Under the bill, a business that isn't ready to adopt a 401(k) or other retirement plan would be encouraged to enroll employees in an outside IRA through payroll deductions.
  • Assets must be invested in a "qualified default investment alternative," which the Labor Department defines as a balanced fund, a professionally managed account or a life-cycle or target-retirement mutual fund, in which the investing strategy automatically moves from higher-risk, higher-yield in the early years to lower-risk, lower-yield as the worker nears retirement.
  • The investment alternative must be diversified to minimize the risk of large losses, and the 401(k) plan must offer a "broad range of investment alternatives."
  • The employer may not invest workers' money directly into company stock.

"Too many workers, some overwhelmed by investment choices or paperwork, are leaving retirement money on the table by not signing up for their employers' defined-contribution plan," Labor Secretary Elaine L. Chao said.  "This regulation would boost retirement savings by establishing default investments for these workers that are appropriate for long-term savings."

Source: Pamela Yip, "Future of 401(k) is automatic," Dallas Morning News, October 2, 2006.

 

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