How to get workers to put more in a 401(k)

The Insider

Your Money

April 11, 2004|By BILL BARNHART

TWO ITEMS from the e-mailbag:

"Almost half of workers who have not saved for retirement indicate they are confident they will have enough money for retirement. Asked why, their responses, taken as a whole, suggest they believe the money will come from someplace." - Employee Benefit Research Institute survey.

Forty-two percent of American workers are not saving for retirement, the institute said.

"Alarmingly, only one in four American workers agreed with the statement, `My company is concerned about my long-term financial future.'" - Principal Financial Group survey.

Unless you favor survival of the fittest as the solution to the nation's retirement income gap, the popular 401(k) savings program needs more muscle.

"Before 2001, employees were saying, `Give me more choice,' said David L. Wray, president of the Profit Sharing/401(k) Council. "Employees since 2001 increasingly have said, `Help me.' Employees who are speaking up have turned 180 degrees."

"The standard model has been let's educate them more, but we've been doing that for 10 or 15 years," said Stephen Utkus of Vanguard Group's retirement research unit.

"There is a large group of individuals who are not predisposed to be savers and investors."

Breaking the inertia of non-savers would help the majority of workers, who are saving too little.

Last month, in an informal letter to former Treasury official J. Mark Iwry, the IRS blessed three ideas:

No limit on the percentage of pay that employers may earmark in placing workers automatically in a 401(k) program.

No limit on periodic increases in pay that may be diverted automatically into savings.

No limit on automatically diverting a portion of pay increases into retirement savings.

"The employer should be able to use a percentage that is as high as it deems appropriate in light of its work force, and one that escalates," said Iwry, an attorney with Sullivan & Cromwell and authority on pension issues.

Automatic enrollment allows workers to opt out of, not opt in to, retirement savings. Initial programs, which began in 1998, diverted just 3 percent of pay and put the money in low-yielding money funds.

Many early programs failed to have much impact because the amounts diverted were too small and the investment strategy was too conservative.

"It's not any more prudent from a fiduciary perspective to choose an extremely conservative fund or an over-aggressive one," Professor Brigitte C. Madrian of the Wharton School said.

Professor Richard H. Thaler of the University of Chicago said the IRS letter to Iwry helps clear the regulatory fog surrounding what he calls the triple play of retirement savings: automatic enrollment, automatic increases in contributions tied to pay raises and a prudent investment program of stocks and bonds.

Compensation consultant Hewett Associates suggests a compromise:

Workers receive a simple response card, indicating that 6 percent of pay will be diverted into a balanced stock/fixed income fund. They are given a deadline. The card is sent later to increase the saving rate.

Bill Barnhart is a financial columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at

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