Some in Congress support enhancing 'automatic' 401(k)s

National initiative focuses on workers with low and moderate incomes

Author: Sara Hansard

Published: March 7, 2005

Congressional leaders who deal with retirement issues are taking an interest in looking at ways to enhance ''automatic'' 401(k)s, after a new national initiative was announced last week to make the defined contribution plans easier for moderate- and low-income people to use.

Sens. Charles Grassley, R-Iowa, the Senate Finance Committee's chairman, and Max Baucus, D-Mont., the ranking minority member, released statements supporting the effort by the Retirement Security Project in Washington to come up with proposals to enhance automatic-enrollment 401(k) plans, as well as savers' credits, which provide government funding for low-income people to save for retirement.

''We all know that Americans are not saving enough, so efforts to encourage more personal savings for retirement and more options for saving are important,' ' Mr. Grassley said in his statement. ''In Congress, increasing opportunities for personal savings will take support from Republicans, Democrats and Independents.''

'Constructive ideas'

Mr. Baucus predicted in his statement that the Retirement Security Project, sponsored by the Pew Charitable Trusts in Philadelphia, and Georgetown University's Public Policy Institute and The Brookings Institution, both in Washington, ''will stand at the forefront of efforts to provide constructive ideas to address the critical need to increase personal savings in America.''

Rep. Ben Cardin, D-Md., who has co-sponsored several major pieces of legislation that have increased contribution limits for retirement savings plans, said of the proposals put forward last week on automatic 401(k) plans and savers credits: ''I strongly support that.''

He said that he and Rep. Rob Portman, R-Ohio, who co-authored the pension bills that have been passed, are working on another pension bill that would likely include provisions to enhance automatic 401(k)s.

But David Wray, president of the Profit Sharing/401(k) Council of America in Chicago, which represents companies that sponsor 401(k) plans, said the plan's promoters' ''intentions are good but impractical.'' He said the proposal would require more generous matching contributions than most employers provide, and the plan would require that employees be vested immediately in the plans.

Employers typically match 50% of employee contributions up to 6% of pay, Mr. Wray said.

Under the proposal, in order to get a ''safe harbor'' of regulatory approval, employers would have to match employee contributions up to 3% of pay, and employers would then have to match half of the next 2% contributed by employers. That means employers would have to match a total of 80% of employee contributions up to 5% of pay.

''You would have less flexibility,'' Mr. Wray said, referring to employers. The Retirement Security Project plan proponents are saying: '''We want you to do something you're not doing now, but we're going to make it more expensive for you,''' he said.

Under the 401(k) plan proposed by the Retirement Security Project, employers would be protected from regulatory liabilities imposed on them for ' 'non-discrimination'' testing, which is aimed at ensuring that rank-and-file workers participate in the plans.

But Mr. Wray said that employers already receive such ''safe harbor'' treatment if they offer automatic-enrollment 401(k)s. About 8% of the 400,000 401(k) plans in effect include automatic enrollment, he said.

At the press conference here last week, Bill Gale, a senior fellow at The Brookings Institution, said automatic-enrollment 401(k)s would help get more workers saving for retirement in the employer-sponsored defined contribution plans.

Boosting enrollment

He espoused a plan similar to what University of Chicago economics professor Richard Thaler has advocated. Workers would be automatically enrolled in the plans under this system, and they would have to instruct their companies specifically if they didn't want to be enrolled.

Mr. Gale said automatic-enrollment plans typically boost enrollment from the current level of one-fifth of workers who have access to the plan's participation to as much as four-fifths of new workers. They are especially successful at getting female and Hispanic workers into the plans.

That could make it easier for employers to meet ''non-discrimination'' regulations that require them to have a broad base of rank-and-file workers in the plans.

The plan put forward by Mr. Gale also would re-balance workers' 401(k) accounts automatically by using broad-based investments in low-cost life cycle funds. The accounts would be automatically rolled over whenever workers change jobs.

He also suggested that automatic annuitization could be included, but he said that that would be more difficult to design because people differ with regard to their wealth, insurance and Social Security coverage.

''You don't have to destroy the entire system to make it happen,'' Mr. Gale said. ''You can do it step by step.''

Contribution rates can be increased over time or when workers get raises.

Currently, about one-tenth of the approximately 400,000 401(k) plans in the country have these features, Mr. Gale said. Some $1.8 trillion is now in 401(k) plans.

Employers would be enticed to offer the plans by receiving ''safe harbor'' treatment from fiduciary liability and the non-discrimination rules under the plan.

Vicky Blanton, a senior lawyer for J.C. Penney Corp. Inc. of Plano, Texas, who spoke at the press conference, said her company increased enrollment in its 401(k) plan to 86% of employees, from 71%, when an automatic-enrollment plan was implemented in 1997.

Many of J.C. Penney's employees make less than $30,000 a year. The company now has more than 75,000 participants in the plan.

The plans proposed, which also include making the ''savers' credit'' for low-income people ''refundable'' - meaning people who pay no income tax would receive money from the government to save for retirement - have gotten attention on Capitol Hill.

Judy Miller, an aide to Mr. Baucus, said some states have laws that make it impossible to implement the plans. Employers would like Congress to pre-empt such state laws, she said, and they also want legal protection to put in automatic investment options unless workers opt out of the plans.

Advisers approve

Employers also are looking for provisions allowing them to refund small amounts in accounts if employees decide to opt out of plans within the first three months.

While getting congressional approval would be difficult, some financial advisers like the idea.

''It's a favorable thing,'' said Ivory Johnson, director of financial planning at The Scarborough Group Inc., an Annapolis, Md., registered investment adviser firm.

While the plan doesn't address the 50% of workers who don't have access to employer-sponsored 401(k)s, ''for those who do have access, it would improve the contribution rate,'' he said.

John Longstaff, principal senior partner of Beechwood Advisory Group LLC in Fresno, Calif., agrees.

About 30% of the $160 million Beechwood manages is in 401(k) plans, and the company helps set up the plans for small businesses.

''Anything we can do to entice and not force the participation in anything for retirement is going to be a good thing,'' Mr. Longstaff said.