Revisions to Savings Rules Proposed

By Michelle Singletary
Thursday, September 28, 2006

As part of a new law designed to encourage more people to save for retirement, the Labor Department has proposed rules to guide companies that automatically enroll workers in certain retirement savings plans, including 401(k)s.

The Pension Protection Act of 2006, signed recently by President Bush, made 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 teenager's pants. Both are left hanging.

For the most part, workers are signing up for the defined-contribution plans that replaced them, electing to take pretax dollars and invest them in various investment options, including 401(k)s. But there are still holdouts. About one-third of eligible workers do not participate in 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, worrying 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 to shield fiduciaries of individual account plans when certain default investment alternatives are selected for workers. After all, if you're automatically enrolling people, then you have to invest their money somewhere.

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 direct their contributions to 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 lifecycle or targeted-retirement-date fund, a balanced fund or a professionally managed account.

A lifecycle fund or target-date fund allocates the money you invest according to a schedule based on your target retirement date. The longer you have until retirement, the more aggressive the fund may be because you have more time to ride the ups and downs of stocks. Investments in lifecycle funds are automatically readjusted according to the fund's objectives.

A balanced mutual fund typically has a combination of stocks and bonds with a goal of preserving your principal investment and providing some income. And just like it sounds, the third option for automatically enrolled employees would be a professionally managed account.

Typically, companies that automatically enroll employees put their contributions in either a money market mutual fund or a stable value fund, according to Dallas L. Salisbury, president and chief executive of the nonprofit Employee Benefit Research Institute. (A stable value fund generally has returns that are a few percentage points higher than a money market fund.)

The new choices outlined by the Labor Department are aimed at helping employees gain greater returns over the long term. However, Salisbury is concerned that employees who cash out of their retirement accounts in the short term will be subject to wild swings in the market and could end up losing money. Salisbury said the options should allow plan sponsors to default to the more conservative money market and stable value funds.

"As a plan sponsor, if this is what the regulation says, I would not adopt it," Salisbury said.

Salisbury does make a good point given the fact that many employees with relatively small amounts of money in their 401(k)s do cash out when they change jobs.

If you have an opinion about the proposal, now's the time to speak up. The comment period runs Sept. 27 to 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. NW, Washington, D.C. 20210, Attention: Default Investment Regulation; or electronically to e-ORI@dol.gov or http://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 retirement savings plans. Nobody is locked in and this is an example of where inertia could help folks in the long term.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By e-mail:singletarym@washpost.com.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible.