Pension bill becomes law

Scott Tong Aug 17, 2006

KAI RYSSDAL: I happened to catch it as I was walking by the office TV earlier. It took President Bush all of about 30 seconds to sign the pension bill, shake a couple of hands, and make his way out of the room. Quick business for a piece of legislation that took years to write. The new law will affect tens of millions of people. Companies are going to have to put away enough cash to cover their pension obligations. Bankrupt airlines will get extra time. And there’s a little something for those of us with 401k plans too. Marketplace’s Scott Tong reports from Washington.

SCOTT TONG: Retirement experts worry that not enough of us have 401ks. Only 4 out of 10 low-income workers sign up, and just half of twenty-somethings.

Financial advisor Chris Brown says the problem’s inertia — you know, that physics concept where a potato on the couch tends to stay there.

CHRIS BROWN: People don’t make major changes to their lives until they have to. They’re basically scared about or they feel ignorant about making financial decisions. So they put them off.

Inertia also means folks who do have 401ks often ignore them.

BROWN: The default option may be money market fund. And it’ll sit there, and often sit there for years.

Lately, some companies have been making retirement choices for workers unless they opt out.

Safelite Auto Glass sticks each employee in a 401k, plucks out 2 percent of the salary and matches it, and picks an investment — automatically.

Paternalistic? Maybe. But the company’s Brenda Downing says they had to do something.

BRENDA DOWNING: We had a significant number of associates not saving at all. We were concerned they weren’t going to be OK at the time they retired.

Auto enrollment boosted Safelite’s 401k participation rate from 40 percent to 80. Hardly anyone opted out.Other companies like the idea but they worry it conflicts with other discrimination and wage laws.

Today’s new pension law says “nope.”

Harvard retirement scholar Brigitte Madrian:

BRIGITTE MADRIAN: It provides a recognition, and an endorsement of automatic enrollment that government regulators think makes a lot of sense.

The law also lets employers put young workers automatically in more aggressive mutual funds — without fear of being sued when the funds dip. Now remember, workers can opt out and take the do-it-yourself route.

But Madrian says automatic enrollment is perfect for those who are less decisive.

MADRIAN: You know the people who when they go into a French restaurant would just as soon have the chef pick the menu because they don’t understand what’s on it.

She expects more employers will migrate to automatic 401k enrollment. But slowly, cuz it’s pricey. More employee savings means more matching funds from their bosses.

In Washington, I’m Scott Tong for Marketplace.

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