New 401(k) Plan Regulations Should Increase Retirement Assets
Kurt Brouwer October 25th, 2007
As we reported previously in $16.4 Trillion in Retirement Assets, Americans have amassed substantial savings in retirement plans, IRAs and other tax-deferred retirement accounts. This accumulation of wealth for workers has been one of the largely untold stories of the past 30 years.
I am happy to say that Congress and President Bush have crafted a new law that should accelerate the process of accumulating assets for retirement. And, it was specifically designed to help those who need help the most. The Pension Protection Act was signed into law last year and it should accelerate the accumulation of retirement assets, with a particular emphasis on those workers who have not yet enrolled in a 401(k) plan or those who are enrolled, but have not figured out how to invest the assets in their account. This new law also has implications outside the world of retirement plans because it should result in significant new assets being invested in our financial markets, particularly in stocks and bonds.
Now, the Department of Labor has released new regulations for 401(k) plans to help companies better understand how to comply with the requirements of last year’s law. Not only will the guidelines help employers, but they should also benefit employees, particularly those who are not already enrolled in their company’s plan and also it should benefit those who have not made any investment elections or have just chosen the money market fund option. Here are some excerpts from the DOL’s factsheet on these new regulations [emphasis added]:
‘…Approximately one-third of eligible workers do not participate in their employers’ 401(k)-type plans. Studies suggest that automatic enrollment plans (in which workers “opt-out” of plan participation rather than “opt-in”) could reduce this rate to less than 10%, significantly increasing retirement savings.
The Pension Protection Act (PPA) President Bush signed into law last year removed impediments to employers adopting automatic enrollment, including employer fears about legal liability for market fluctuations and the applicability of state wage withholding laws.
These impediments prevented many employers from adopting automatic enrollment, or led them to invest workers’ contributions in low-risk, low-return “default” investments.
The PPA directed the Department of Labor to issue a regulation to assist employers in selecting default investments that best serve the retirement needs of workers who do not direct their own investments…
What this means is that employers can feel comfortable about automatically enrolling employees in the 401(k) plan. If an employee wants out, he or she would have to take steps to get out. In the past, employees had to choose to ‘opt-in’ to the plan and many employees simply never got around to doing so.
The FactSheet goes on to quantify the additional retirement savings that should be gained through automatic enrollment and it also clarifies what types of investments can be used for this default option:
‘…By facilitating the adoption of automatic enrollment plans, and by encouraging investments appropriate for long-term retirement savings, the Department estimates the rule will result in between $70 billion and $134 billion in additional retirement savings by 2034…
The FactSheet also covers another very important provision of the law which allows employers to set a balanced investment account or balanced mutual fund as the ‘default’ investment option so that employees who do not select an investment will now be invested in a more appropriate long-term portfolio (instead of a money market fund or other relatively short-term fund).
…Qualified Default Investment Alternatives
The final regulation does not identify specific investment products – rather, it describes mechanisms for investing participant contributions. The intent is to ensure that an investment qualifying as a QDIA is appropriate as a single investment capable of meeting a worker’s long-term retirement savings needs. The final regulation identifies two individually-based mechanisms and one group-based mechanism – it also provides for a short-term investment for administrative convenience.
The final regulation provides for four types of QDIAs:
- A product with a mix of investments that takes into account the individual’s age or retirement date (an example of such a product could be a life-cycle or targeted-retirement-date fund);
- An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (an example of such a service could be a professionally-managed account);
- A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (an example of such a product could be a balanced fund); and
- A capital preservation product for only the first 120 days of participation (an option for plan sponsors wishing to simplify administration if workers opt-out of participation before incurring an additional tax).
A QDIA must either be managed by an investment manager, plan trustee, or plan sponsor who is a named fiduciary, or be an investment company registered under the Investment Company Act of 1940…’
Though an employer has several choices as to what kind of investment could qualify as a QDIA, whatever option is selected must be ‘…a single investment capable of meeting a worker’s long-term retirement savings needs…’ Further, by referencing specific types of investments that generally have a stock allocation (life-cycle, target date and and balanced funds), the regulations seem to imply that such as account would have to hold some stocks or stock mutual funds or similar assets to qualify.
All in all, I think this is an excellent regulation and it should do a lot to help working people salt away more assets for retirement. Kudos to Congress, President Bush and the Department of Labor.
Update: Here are other posts on retirement issues:
Will You Run Out of Money In Retirement?
Fidelity Targets Retirement Income Needs
Hat tip: Capital Commerce Blog & BrothersJuddBlog
- Business , Investing , Mutual Funds , Personal Finance , Retirement
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