Automatic Signup in 401(k)s Backed
Source: BenefitsLink
House Ways and Means Chairman Bill Thomas (R-Calif.) will include a provision in his Social Security legislation to help employers make enrollment in 401(k) plans automatic unless workers choose to opt out, according to congressional staff and knowledgeable lobbyists. The provision could have substantial impact on the nation’s savings rate, which has declined from 7.2 percent in 1992 to barely 1 percent today. Recent academic research has shown that employee participation rates soar among companies with automatic enrollment in retirement plans.
Christin Baker, a spokesman for the Ways and Means Committee, said she could not confirm whether any particular provision has been included in the broad package of retirement savings proposals Thomas is assembling. But lobbyists who have met with Thomas say he has given his word on the matter.
“You can take it to the bank,” said one Republican lobbyist with close committee ties, who spoke on the condition of anonymity to protect his relationship with the chairman.
The decision comes as negotiations proceed on a retirement savings bill that will propose a long-term fix for Social Security. Thomas hopes to include enough items with broad appeal to win majority support for a Social Security plan that at least approximates President Bush’s proposal to convert some of the program’s defined benefits to private savings and investment.
According to two lobbyists familiar with the discussions, Thomas has suggested to life insurance interests that he would back incentives for employers to convert 401(k) balances to private annuities that would pay out slowly over a worker’s retirement. In exchange, the life insurance industry would not work against a dramatic expansion of Individual Retirement Accounts, 401(k)s and tax incentives designed to expand personal retirement savings. Such government-supported savings vehicles tend to eat into the insurance companies’ private annuities business. Such a deal would be controversial, one GOP lobbyist said, because converting 401(k) balances to privately managed annuities would eat into workers’ savings balances.
While this legislation appears to make automatic 401ks voluntary rather than mandatory, the idea itself bothers me. Many employers avoid direct compensation of employees (with associated taxes) by compensating them in company stock or using a similar arrangement. While completely legal, it leaves employees in a situation where their stated salaries are less than their actual salaries. Unfortunately, most programs requiring income qualification use stated salaries. (I ran into this several times while working with the state, since North Carolina is one of the few states where state employees have both FICA and 401a retirement plan deductions.) I’m concerned that the legislation could open the door to making this practice more common.
I’m also concerned because there seems to be a trend toward mandatory 401k participation, which I do oppose. Workers have a variety of options available for private savings and forcing one particular method not only deprives the worker of immediate compensation, but also keeps him/her from using whatever savings scheme he/she chooses. “Day trading” is far less common, but many people still invest in private stock, bonds, mutual funds, IRAs and other investment vehicles. Dollar-cost averaging is still very popular.
My greatest unease, though, is with the concept of turning 401ks into private annuities. In effect, this would mean that a worker will no longer have a choice about the method of payout for his/her 401k. As such, they would become more like pensions and social security, and less like true investments. There are sometimes very good reasons to take out 401k savings using a non-annuity method. Only the individual worker can make that decision — not the government and definitely not the worker’s employer.