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The Honolulu Advertiser
Posted on: Thursday, July 6, 2006

401(k) enrollment may change

By Susan Tompor
Detroit Free Press

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:

  • If your company offers to match your savings, contribute as much money as you can into your 401(k) so you get the maximum match. Do not leave any free money on the table.

  • Invest as little money as possible in your own company's stock in the 401(k) plan. You're taking on too much risk if you're betting your retirement future on the ups and downs of one company's stock price. You want to diversify your investments and have a mix of stocks, bonds and money market funds.

  • Save more money. It is not enough to save 2 percent or 3 percent of pay for retirement in a 401(k). Yes, it's better than nothing and it's OK to start out slow. But you need to build that savings rate to 10 percent or 15 percent even more if you're older.

  • Do not spend money in a 401(k) plan when you change jobs. Roll that money into the 401(k) plan at your new company, roll it over into an individual retirement account or leave it at your old company plan, if that's an option.