Automatic Signup In 401(k)s Backed
Sunday, May 22, 2005
House Ways and Means Chairman Bill Thomas (R-Calif.) will include a provision in his Social Security legislation to help employers make enrollment in 401(k) plans automatic unless workers choose to opt out, according to congressional staff and knowledgeable lobbyists.
The provision could have substantial impact on the nation's savings rate, which has declined from 7.2 percent in 1992 to barely 1 percent today. Recent academic research has shown that employee participation rates soar among companies with automatic enrollment in retirement plans.
Christin Baker, a spokesman for the Ways and Means Committee, said she could not confirm whether any particular provision has been included in the broad package of retirement savings proposals Thomas is assembling. But lobbyists who have met with Thomas say he has given his word on the matter.
"You can take it to the bank," said one Republican lobbyist with close committee ties, who spoke on the condition of anonymity to protect his relationship with the chairman.
The decision comes as negotiations proceed on a retirement savings bill that will propose a long-term fix for Social Security. Thomas hopes to include enough items with broad appeal to win majority support for a Social Security plan that at least approximates President Bush's proposal to convert some of the program's defined benefits to private savings and investment.
According to two lobbyists familiar with the discussions, Thomas has suggested to life insurance interests that he would back incentives for employers to convert 401(k) balances to private annuities that would pay out slowly over a worker's retirement. In exchange, the life insurance industry would not work against a dramatic expansion of Individual Retirement Accounts, 401(k)s and tax incentives designed to expand personal retirement savings. Such government-supported savings vehicles tend to eat into the insurance companies' private annuities business.
Such a deal would be controversial, one GOP lobbyist said, because converting 401(k) balances to privately managed annuities would eat into workers' savings balances.
But automatic enrollment in 401(k) plans would be popular. Employers like the idea because increasing enrollment in 401(k) plans means reducing the cost of administering them. Economists of all political stripes like it because it appears to work.
About 10 percent of companies with 401(k) plans already enroll new hires automatically, unless the employees opt out. A 2001 study by the University of Pennsylvania's Brigitte C. Madrian and United Health Group's Dennis F. Shea found that in one large corporation, 401(k) participation among new hires jumped to 85.9 percent from 37.4 percent when enrollment became automatic. For minorities and low-income workers, the change was even more dramatic.
Mandating automatic enrollment would easily create $20 billion in new retirement savings a year, said Peter R. Orszag, director of the Retirement Security Project, run by Georgetown University and the Brookings Institution. If Congress pushed employers to slowly increase contribution rates over time, savings would increase well in excess of $50 billion a year.
To expand automatic enrollment, Congress needs to preempt some state labor laws, which many companies interpret as preventing the practice, Orszag said. Lawmakers also need to shield companies from legal liability to protect them from workers potentially suing over investment losses.
Thomas hinted at his position at a Social Security hearing Thursday when he asked a bipartisan panel if any of them opposed "the idea of an automatic enrollment with an opt-out in whatever the program is."
After the panel responded, Thomas quipped, "The chair would indicate all of the members moved almost simultaneously with a motion to the left and right of the head, which denotes they would not be upset by that."