Rule would encourage automatic 401(k) enrollment

By Kathy Chu, USA TODAY

The Department of Labor expects to propose a regulation by year's end that will encourage companies to automatically enroll their workers in 401(k) plans.

"We want to remove barriers for people to save for retirement, and automatic enrollment really addresses one of the problems that people face: They may be overwhelmed with the responsibility of saving for retirement," says Ann Combs, assistant secretary at the Labor Department's Employee Benefits Security Administration.

Once the regulation is proposed, the public will be able to comment on it before it becomes final. The regulation could affect millions of workers in 450,000 retirement plans.

In the typical 401(k) plan, employees decide whether to invest and, if they choose to, how much and where to put the money. But 19% of large employers automatically enroll workers, at an average rate of 3% of annual pay, according to research firm Hewitt Associates. This compares with 7% of companies that did so in 1999.

The Labor Department says the proposed regulation should give employers who automatically enroll workers in a 401(k) plan some protection from lawsuits if the investment options chosen are "reasonable." Some companies are reluctant to use automatic enrollment for fear that employees whose investments lost money would sue.

The regulation also likely will tell companies that "they can offer balanced investment options with a little more risk but with returns that allow people to save enough for retirement," says Combs.

Many companies that automatically enroll employees use conservative money-market or stable-value funds as a default. These are relatively safe but aren't likely to produce as much growth as balanced equity options.

If employers view the Labor Department's guidance favorably, it could be seen as removing the last barrier to automatic enrollment, says Jack VanDerhei, a fellow at the Employee Benefit Research Institute. The IRS has blessed some aspects of automatic enrollment.

Automatic enrollment can be extremely effective in boosting 401(k) participation, especially among young and lower-income workers, says Brigitte Madrian, a business professor at the University of Pennsylvania's Wharton School.

Taking advantage of 401(k) plans is becoming increasingly important as companies drop pension plans. The number of private-sector pension plans fell nearly 50% in the last decade to 31,238 last year, according to the Pension Benefit Guaranty Corp.

Companies also have a business incentive to get employees enrolled because an IRS rule limits the amount higher-paid workers are allowed to save to the amount rank-and-file workers actually contribute.

But automatic enrollment is not a panacea, VanDerhei says, because the company's choice of investment options and contribution levels might not work for many employees.

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