Saving for retirement to require more work

In bill, employees given added onus

August 05, 2006|By EILEEN AMBROSE | EILEEN AMBROSE,SUN REPORTER

One message is clear in the pension legislation newly passed by Congress: Workers will bear more responsibility for saving for their own retirement.

But employers also are being nudged to help employees become better savers.

President Bush is expected to sign the pension bill that was years in the making. While the legislation will improve the funding of traditional, employer-provided pensions that pay retirees a monthly check for life, it also might make pension costs less predictable and cause employers to dump these plans even more quickly than they are doing now, some retirement experts said.

Today, about 25 percent of private-sector employees are covered by a traditional pension, down from about 45 percent a decade ago, said Sylvester J. Schieber, a benefits expert with Watson Wyatt Worldwide. Which makes provisions to bolster 401(k) savings plans and individual retirement accounts all the more crucial to workers.

"The [pension] changes are getting all the attention, but the 401(k) reforms are the most important part of the bill ... particularly for younger workers and future workers," said Matt Moore, a senior policy analyst with National Center for Policy Analysis in Dallas. "Generally, younger workers are not going to depend on Social Security and Medicare to support them in retirement, so we will have to start saving more on our own."

Among the changes are measures that encourage employers to automatically enroll workers in 401(k) plans - a provision meant to nudge the 11 million to 12 million workers who are eligible but haven't signed up - and provide investment advice. It also makes permanent many retirement features that were set to expire in the next few years.

This will erase a lot of uncertainty and could encourage more workers to save, retirement experts said.

"It makes it easier for people to think it's worth going to all the trouble," said Dallas Salisbury, president of the Employee Benefit Research Institute in Washington.

As of last year, 24 percent of large-scale employers automatically enrolled workers in their 401(k) plans, as opposed to putting the onus on workers to sign up, according to a survey by Hewitt Associates.

Automatic enrollment "has been a growing phenomena for years," said Steve Metz, a principal with PricewaterhouseCoopers HR Solutions in Philadelphia.

Companies favor automatic enrollment because it's highly effective in getting workers to participate. Still, many employers have hesitated, worried about running afoul of state laws that restrict garnishing of wages.

In the bill, Congress encourages automatic enrollment in two ways: It protects plans with automatic enrollment from state laws. Also, if employers enact automatic enrollment and meet certain guidelines, they will no longer have to undertake expensive testing to make sure their 401(k) complies with federal rules forbidding favoritism toward highly paid employees, said Stuart Ritter, a financial planner with T. Rowe Price Associates.

These are the guidelines Congress spells out:

Workers must have 90 days to opt out of automatic enrollment without penalty.

Employee contributions under automatic enrollment must be 3 percent of pay the first year, and gradually rise 1 percentage point a year until reaching 6 percent in the fourth year. Contributions can stay at 6 percent, or employers have the option of increasing worker contributions all the way up to 10 percent.

The 401(k) must offer at least three diversified investment options, and none of the three can be employer stock. One of those options is likely to be a lifecycle fund - a type of fund that automatically shifts the investment mix as a worker ages, said policy analyst Moore.

Companies must provide a matching contribution. The formula calls for a dollar-for-dollar match for the first 1 percent of pay that workers contribute. Thereafter, it's 50 cents for every dollar, up to 6 percent of worker's compensation. That boils down to a 2 percent match the first year, with the match gradually rising to 3.5 percent.

Or employers can set aside 3 percent of compensation for all workers, whether or not they contribute.

Workers would be vested in the plan after two years.

The investment advice provision that would take effect next year is controversial. While consumer advocates and investment professionals agree workers need help in choosing investments, how best to provide that guidance has long been a matter of debate.

Employers have been reluctant for years to provide advice for fear of being liable if workers get bum guidance from an adviser. The legislation still would make employers responsible for hiring a good financial adviser, but they won't be held accountable for the advice, Salisbury said.

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