New push to boost 401(k) participation
TEXT OF INTERVIEW
Lisa Napoli: This week the Labor Department issued guidelines for companies hoping to comply with a new law that makes it easier for people to start saving for retirement. It’s called The Pension Protection Act. If you get a new job, or if you’re working at a company and haven’t signed up for their 401(k) plan, now you’ll be automatically enrolled.
David Wray is with the Profit Sharing/401(k) Council of America.
Napoli: David, what are these new guidelines all about?
David Wray: Automatic enrollment was pioneered about 10 years ago by McDonalds and the interest in this has built over time as companies have experimented with this and these regulations are really the culmination of a review process that has been underway for over 10 years. A number of companies, already, are doing this, but for the hundreds of thousands of companies that have 401(k) plans to move forward, they needed the security of a dotted-I, crossed-T regulation and these regulations now give them that kind of guide path.
Napoli: Tell me more about what the regulations do and why they benefit me as an employee.
Wray: Well, if you are not participating in your 401(k) plan, the guide path on how the money is going to be invested is going to encourage your company to go ahead and automatically enroll you in the plan and they’re going to give you a decent 401(k) outcome even if you do nothing.
Napoli: So basically, this rule will force everybody to have a 401(k) if there company offers it?
Wray: Well, it won’t force them. The voluntary feature of the 401(k) remains, but if they don’t say no, then this money is going to be withdrawn from their paycheck and invested for them. That’s a huge 180 degree difference from the current approach, which has been the employee had to give permission and then make the investment decision.
Napoli: Why is this rule a good thing?
Wray: The participation rate with the current voluntary approach seems to have plateaued at about 70 percent. We want every single person to be saving for retirement in these plans if they’re offered. And so, a new idea had to come about to fill that gap, get those other 30 percent of the people in the plans — or most of them, because some people will still opt out.
Napoli: Are there any pitfalls to all of this? I mean, I can’t imagine why somebody wouldn’t want to be saving for retirement if their company made a provision for them to.
Wray: The downside is modest but there is one, and that’s that we don’t want automatic enrollment to become the standard of excellence. The ideal is still that the employee evaluate their own retirement needs. These plans by their very nature are not going to withdraw large amounts, for example, from an employee’s paycheck. The ideal situation is that they still learn how to be long-term savers and investment managers, but this certainly is a big step down the path for that other 30 percent.
Napoli: David Wray is president of Profit Sharing/401(k) Council of America. Thank you, David.
Wray: Thank you very much for having me.
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