Big Changes Proposed For Employer Retirement Plans

by Jim Giuliano
Posted in: Special Report-September 17, 2009

President Obama has big plans for changing company-sponsored retirement plans, especially for small businesses. The Administration’s latest initiative would expand automatic enrollment in 401(k)s and other retirement savings plans to make it easier for companies – especially those smaller and midsize firms lagging behind their larger counterparts – to sign up their workers and decide whether and how much they should save for retirement.

Under these plans, employers deposit a set percentage of each employee’s paychecks into his or her retirement account – unless the worker opts out, or chooses to invest a different amount. President Obama’s initiative will make it easier for employers of all sizes to adopt automatic enrollment by allowing them to rely on pre-approved language issued by IRS. Currently, plan sponsors typically must first get the agency’s written approval to amend their plans.

Here are two more features that may cause employee concern:

1. “Escalator” contributions. Employers will be able to gradually increase employees’ contributions over time, according to the plan design. Companies can set the increase amount, which will probably send unhappy workers scurrying to HR’s door to opt out, once they notice their paychecks shrinking. The just-released Revenue Ruling 2009-30 explains this so-called escalator feature.

2. Conversion of unused leave time into 401(k) contributions. Employers can set up plans to allow workers to convert certain leave time (e.g., current employees with expiring leave or those terminating with unused time) into contributions – and still comply with the complex plan regs. (See Revenue Ruling 2009-31 and Revenue Ruling 2009-32. ) The guidance also discusses when the amounts should be included in the former worker’s gross income. While this conversion option may appeal to higher-ups who can afford to save more, many rank-and-file employees leaving their jobs would probably still rather receive substantial cash payments.

So why the changes?

While these ideas may not excite cash-strapped workers, recent research has found automatic enrollment programs go a long way toward helping the nearly 78 million Americans who don’t have a retirement savings plan at work. The Administration says there’s a clear need because fewer than 10% of those without a plan at work formally save for retirement on their own.

For example, a 2009 survey by the Vanguard Group released last month found that automatic enrollment boosts participation dramatically. In fact, plans that offered the option had an overall participation rate of 84% last year, compared with 60% for plans that didn’t offer it. An earlier study by Hewitt Associates yielded similar results.

You can look here to read the Treasury and IRS rulings and materials, including more info on other savings options such as using federal tax refunds to purchase savings bonds.