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The Honolulu Advertiser
Posted on: Thursday, September 28, 2006

New law helps employer 'force' you to save for retirement

By Michelle Singletary

As part of a new law designed to encourage more people to save for retirement, the U.S. Department of Labor has proposed rules to guide companies that automatically enroll workers in certain retirement savings plans.

The Pension Protection Act of 2006, signed recently by President Bush, makes it easier for companies to force employees to save for their retirement. I used the word "force," but I don't mean it in a negative way. After all, traditional pensions, known as defined-benefit plans, are about as rare as a belt on many a young teenager's pants. Both are left hanging.

Workers can no longer count on their employer putting away money for their retirement. Thus the 401(k) and similar employer-sponsored retirement plans were born.

For the most part, workers are signing up for them, electing to take pre-tax dollars and invest them in various investment options. But there are still holdouts. About one-third of eligible workers do not participate in these defined-contribution plans, according to the Labor Department.

To encourage workers to save, some employers decided to automatically sign up workers. The theory is that once you enroll employees in a 401(k), most won't make the effort to stop the contributions.

Some companies, however, worried that they may be sued for such a paternalistic move, have balked at creating an automatic enrollment system.

That's where the new law comes in. Chiefly, the law amends the Employee Retirement Income Security Act (ERISA) to shield fiduciaries of individual account plans when certain default investment alternatives are selected for workers.

ERISA would essentially provide fiduciaries relief from liability for the investment outcomes. To get this liability protection, the Labor Department wants to make sure companies follow certain guidelines. Here are some key things the department proposes:

  • Companies have to give employees and beneficiaries 30 days notice before the money is invested. And they must continue to get such notice each subsequent year.

  • Companies have to be clear about the investment options available to those who are automatically enrolled. Employees also have to be informed that they can opt to direct their contributions in other investment options.

  • If an employee's contributions are placed in a default investment option, he or she can't be financially penalized if the money is switched to a different option.

  • Participants and beneficiaries must be given the same opportunity to move money out of the default investment choice with the same frequency available for other plan participants.

  • The default options must be diversified to minimize the risk of large losses.

  • An employee's money has to be invested in a "qualified default investment alternative," or QDIA. Under the Labor Department proposal, a QDIA has to be a life-cycle or targeted-retirement-date fund, a balanced fund or a professionally managed account.

    If you've got an opinion about the proposal, now's the time to speak up. The comment period runs Sept. 27 through Nov. 13. Comments on the proposed regulation should be directed to the U.S. Department of Labor, Employee Benefits Security Administration, Room N-5669, 200 Constitution Ave., N.W., Washington, D.C. 20210, Attention: Default Investment Regulation; or electronically to e-ORI@dol.gov or www.regulations.gov. For questions about the proposed regulation, contact EBSA's Office of Regulations and Interpretations at (202) 693-8500.

    Overall, I support automatically enrolling people in a retirement savings plan. Nobody is locked in, and this is an example of where inertia could help folks in the long term.