Automatic Enrollment Into 401K -Type Plans Soon To Become More Common

Monday, October 22nd 2007, 5:49 pm
By: News On 6

WASHINGTON (AP) _ A new law making it easier for companies to automatically enroll their employees in pension plans such as 401(k)s goes into effect soon, the Labor Department said Monday, a move the government hopes will spur increased retirement savings.

The enactment of the Pension Protection Act in December ``will help many more workers and their families build a nest egg for a secure and comfortable retirement,'' Labor Secretary Elaine Chao said.

The Labor Department plans to publish the final rules on Wednesday, and the law goes into effect 60 days later.

By making it easier to companies to include workers in pension plans, department officials estimate retirement savings in 401(k)-type plans could increase by as much as $134 billion by 2034.

Currently, one-third of eligible workers don't participate in 401(k) and other defined contribution plans, which give the employee the option of where to invest the account, usually among stocks, bonds and money market accounts. Studies show automatic enrollment could reduce that figure to less than 10 percent, the department said.

The law, passed by Congress and signed by President Bush last year, aims to make it easier for companies to automatically enroll workers into retirement plans by letting employers require their workers to ``opt-out'' instead of ``opt-in.''

By absolving companies of the liability for an automatically-enrolled worker's investment losses, officials hope to spur more companies to start this type of plan. Some 18 percent of employers now offer automatic enrollment for 401(k) and other similar pension plans, department officials said.

Companies, however, would be liable for the prudent selection and monitoring of investment plan options.

Under an automatic enrollment plan, workers are given an opportunity to make investment selections or tell the company they don't want to participate.

If a company doesn't hear back from the employee, the worker will be notified that he or she will be automatically signed up and invested in a mix of stocks and bonds geared to long-term savings _ referred to as qualified default investment alternatives. Employees can move their money out of the default investments without a financial penalty.

The regulation issued this week specifies the types of default investments companies can use for employees who do not direct their own investments.