401(k)s: Auto enroll, advice get OK
More employers are likely to enroll workers in 401(k)
retirement plans even if they don't sign up, and to give them investment advice.
The act eases a key concern that some companies have had about automatic
enrollment. It does so by pre-empting state laws that bar employee wage
withholding without their permission.
The provision also allows financial firms to give employees guidance about where
to put their money, as long as the overall asset-allocation advice comes from a
computer model reviewed by an independent third party.
This could lead to "a major shift toward advice," rather than just investment
education, says Lynn Dudley of the American Benefits Council.
Automatically enrolling employees in 401(k) plans and giving them investment
advice have been gaining popularity as ways to boost low worker participation
and savings levels in retirement plans. But some employers had been reluctant to
take these steps for fear of violating state laws, inciting lawsuits or boosting
Passage of the bill into law would be like "shooting the gun at the starting
gate," helping these strategies to take off, says Judith Mazo of consulting firm
Already, more than one-third of large employers provide retirement-plan
participants with access to third-party investment advice, and about one-fourth
automatically enroll some workers in 401(k) plans, according to 2005 survey data
by Hewitt Associates. (Employees can always opt out of 401(k) plans if they
prefer not to participate.)
Among large companies that don't offer automatic enrollment or investment
advice, one of the top reasons for not doing so was concern about regulatory
issues, according to Hewitt.
Roughly one-third of employers without automatic enrollment said they needed
clarification about state laws or guidance about default investment options
before offering this to employees. The Labor Department plans to propose a rule
that would address appropriate default investments in 401(k) plans.