Congress set to make 401(k) enrollment automatic

Gannett News Service

Jul. 22, 2006 12:00 AM

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

Congress is nearing final agreement on legislation that would make it more likely that workers would be automatically enrolled in their employers' 401(k) plans.

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

• An employer match of 50 to 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.

• A provision that employees would be vested 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 now required. That is significant for workers at small businesses.

And employees who received a company match in the form of employer stock would have the right to sell that stock and diversify their savings.

Yet to be decided is whether investment advice from the plan administrator would be available. Senate negotiators and worker advocacy groups prefer that the investment advice come from a third party.

A major drawback with 401(k)s is that most plans require employees to opt in.

Automatic enrollment creates an opt-out whereby a worker must notify the employer that he does not want pay withheld for retirement.

"Automatic enrollment really does boost your participation," said Janice Gregory of the ERISA Industry Council, an employer group.

Federal law does not require any employer to establish a retirement plan, but those who do must meet minimum standards.

Five out of 10 workers participated in employer-sponsored retirement benefit programs in 2005, according to the Bureau of Labor Statistics; six in 10 were eligible.

Traditional pension plans are handled entirely by the employer: contributions, investments and payment of monthly checks after retirement.

But 401(k)s shift major 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 his group wants more government action to encourage workers to save.

House-Senate negotiators are expected to complete an agreement by Tuesday. The House could vote on the legislation by the end of the week, with the Senate soon to follow.