NCPA - National Center for Policy Analysis


December 1, 2004

One of the most significant reforms policymakers could adopt to boost voluntary retirement saving would be to change the "defaults" in 401(k) plans in favor of sound retirement preparation, according to John C. Goodman, president of the National Center for Policy Analysis, and Peter Orszag, a senior fellow with the Brookings Institution.

To encourage the adoption of plans with features proven to be effective in helping workers better prepare for retirement, policymakers should:

  • Clarify that retirement savings plans with these features are permissible under state labor laws.
  • Require that, at least as a default, when employment ends, employees' 401(k) accounts are automatically rolled over into another qualified plan or into an IRA, or remain in the previous employer's plan, rather than requiring a terminated employee to take a potentially taxable (and penalized) distribution.
  • Allow plans to disburse small account balances without penalty to employees who decide to opt out soon after the automatic enrollment begins.

Moreover, taxpayers who choose to direct deposit their income tax refund should be allowed to split the refund between accounts. The IRS currently does not allow refunds to be split. This significantly reduces the portion of tax refunds that are saved, since many families are reluctant to deposit their entire refund in a tax-preferred savings account. This proposal would not require additional legislation.

American workers need savings plans that will adequately fund their retirement and which provide flexibility, versatility and expanded investment opportunities. These are keys to encouraging workers at all income levels to invest in their future retirement, today, say Goodman and Orszag.

Source: John C. Goodman and Peter R. Orszag, "Retirement Savings Reforms on which the Left and the Right Can Agree," Brief Analysis No. 495, December 1, 2004, National Center for Policy Analysis.

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