401(k) enrollment may change
By Susan Tompor
Detroit Free Press
By Susan Tompor
Young workers who think they can ignore the world of 401(k)s could be in for a shock. Soon, money could be taken out of their checks — automatically — without workers even signing up for the 401(k) plan.
It's a strategy that folks in the financial services industry are calling "capitalizing on the inertia."
If some employees drag their feet, the company can craft a deal where workers are automatically enrolled in a 401(k). And then, the workers can opt out of the savings plan — if they ever find time or the gumption to do it.
"The evidence is very strong that it does greatly increase participation," said Lori Lucas, director of retirement research for Hewitt Associates, a human resource services firm in Lincolnshire, Ill.
"Many people are simply not participating in the 401(k) plan because they simply have not gotten around to it."
The opt-out buzz is gaining ground. Earlier this month, even Federal Reserve Chairman Ben Bernanke used the words "opt-out" and "401(k)" in the same speech.
Bernanke talked about the field of behavioral economics — and just how hard it is for many people to translate good intentions into positive actions.
"Think about how hard it is to keep New Year's resolutions," Bernanke said in a speech.
He noted that automatic enrollment features in 401(k) plans could help workers manage their money.
"The impact from changing from 'opt-in' to 'opt-out' is particularly evident for younger and lower-income workers, who may have less financial expertise," Bernanke said.
More companies may offer automatic enrollments in the future, especially if some tweaks are made to the rules as part of the major pension legislation in Congress now.
The proposed changes before Congress would offer employers some safe-harbor protections in case workers wanted to blame automatic enrollment for bad investments.
According to a Hewitt survey of 227 companies last fall, about 23 percent said they're very likely to offer automatic enrollment in 2006.
The opt-out theory is that it's a good idea to get workers signed up as early as possible for 401(k) plans.
More companies no longer offer pension plans — or no longer offer them to new workers — and are instead offering 401(k)s.
"This is primarily for workers who are not doing the investing they need to be doing," said Matt Moore, senior policy analyst for the National Center for Policy Analysis, a free-market think tank based in Dallas.
People who do not sign up for 401(k) plans are often losing out on hundreds or thousands of dollars in free money via the company's matching contributions.
Basics on 401(k) plans: