NCPA - National Center for Policy Analysis

401(K) RULES FACE REVISION; CHANGES WOULD PROVIDE AUTOMATIC ENROLLMENT IN PLANS

July 24, 2006

The world of 401(k) retirement savings plans could soon become more like traditional pensions that automatically cover workers, say observers.

Congress is nearing final agreement on legislation that will make it more likely that workers will be automatically enrolled in a 401(k) if the employer offers the program.

Employer groups following the House-Senate negotiations predict the final bill will provide employers with legal protection if their automatic enrollment program includes:

  • An employer match of between 50 and 60 cents for every dollar contributed by the employee.
  • An initial employee contribution of 3 percent of pay that escalates by 1 percentage point a year until reaching 6 percent.
  • A default investment that fits within guidelines to be established by the Labor Department.
  • Employee vesting within two years.

In addition, 401(k) participants would receive a mailed statement of their account balance at least once every three months, which is not currently required.  That's significant for workers at small businesses.  Employees who receive a company match in the form of employer stock would have the right to sell that stock and diversify their savings.

Traditional pension plans are handled entirely by the employer -- contributions, investments and payment of monthly checks after retirement.  But 401(k)s shift those responsibilities to the worker.

"Workers have not been prepared to make these decisions and they have been making a lot of bad decisions," said John Goodman, president of the National Center for Policy Analysis.

Goodman's think tank advocates private sector approaches to public policy issues, but in the case of 401(k)s his group wants more government action to encourage workers to save.

Source: Brian Tumulty, "401(k) rules face revision; Changes would provide automatic enrollment in plans," Rochester Democrat and Chronicle, July 22, 2006.

 

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