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Making Saving for Retirement Automatic

More employers are enrolling workers in 401(k) plans without asking them first, and a bill in Congress could accelerate the trend.

August 02, 2006|Jonathan Peterson | Times Staff Writer

STERLING, Va. — Shannon Scrivens discovered a surprise in her paycheck earlier this year: It went down.

But the mother of four was happy with the modest pay cut, because the money she missed was going into a retirement savings plan.

"I noticed that the 401(k) appeared one day in my pay stub and I was thrilled with it," said Scrivens, 35, as she took a break from her loading-dock job at a sprawling Costco warehouse near Washington Dulles International Airport.

The savings, she said, "is our only nest egg for retirement."

Scrivens is among a growing number of workers whose employers have steered them into retirement savings plans without waiting for them to sign up. The practice, known as automatic enrollment -- or, to some workers, "forced saving" -- is a tradition-breaking effort to push people into putting money away for the future.

Under a pension overhaul bill that the House approved Friday and the Senate is due to take up this week, companies would be granted explicit legal assurance that they could unilaterally shift some of a worker's pay into a retirement savings plan, such as a 401(k) program, unless the employee specifically opted out.

"This is by far the most important thing in the pension bill," said John C. Goodman, president of the National Center for Policy Analysis. "It will lead to substantially more people being in the system."

That, in turn, also could have ramifications for the economy: At a time when consumer spending is weakening, forced saving could worsen that trend by cutting into workers' disposable income.

But advocates say the long-term benefits are worth any short-term pain. They see automatic enrollment as one way to lift the nation's abysmal personal savings rate, which by the government's measure has been negative for 15 consecutive months -- meaning that Americans, on balance, have been spending more than they've earned.

Congress' move to bless automatic enrollment also recognizes that employer-sponsored savings plans increasingly are the only type of pension program available to many workers in an era when traditional pensions are being curbed, experts say.

More than 70 million people are covered by 401(k) or similar savings plans, compared with 44 million beneficiaries of conventional pension plans, under which companies guarantee a set level of monthly income in retirement.

About 24% of major employers automatically deduct a portion of workers' pay for retirement savings plans, a figure that has risen from 7% in 1999, according to a survey by benefits consulting firm Hewitt Associates.

What's more, half the remaining firms in the survey said they were considering moving to forced saving this year.

They may feel freer to act because of the pension bill, which would give employers new latitude in running workplace savings programs. One provision would ensure that automatic payroll deductions wouldn't violate state wage garnishment laws, a concern that has held some companies back.

The bill also would allow financial services firms that manage retirement plans for companies to advise workers on choosing specific investment options in their plans -- say, a U.S. stock mutual fund or a foreign stock fund.

Many retirement plan managers have been prohibited from offering advice because of fear of conflicts of interest, but advocates in Congress argued that workers would benefit from such guidance.

With the new legislation, "you will see a truly massive redesign of the 401(k) plans," predicted David Wray, president of the Profit Sharing/401(k) Council of America.

There has been no major organized opposition to automatic enrollment, although some Wall Street critics have been suspicious of the investment industry's motives in championing the idea. A larger flow of money to 401(k) plans, after all, would mean heftier fees for companies that manage mutual funds and other 401(k) investments.

In addition, top executives at companies have a vested interest in boosting 401(k) participation: Tax rules may allow them to save more themselves in the plans if a larger number of lower-paid workers enroll.

Proponents of automatic enrollment say the initiative may be the best way to address the human traits of inertia and procrastination that can be enemies of saving. Once people are in a savings plan, that same inertia might work to keep them there.

"It takes some effort to look up a phone number and call someone in the plan and say no," said John Matthews, senior vice president for human resources at retailer Costco's headquarters in Issaquah, Wash. "Most people won't."

Scrivens is covered by a Costco plan that funnels 3% of the pay of each new hire into the company's 401(k) plan. Nine out of 10 recent hires have stayed in the program, which began last year, the company says; in the past, most of those workers would not have sought to enroll, experts say.

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