U.S. employees to be automatically enrolled in company retirement plans

[Ronstar]

Our employees were automatically enrolled in our 401k about 10 years ago when we changed to a safe harbor plan.

Prior to the change, Our plan didn’t pass the non discrimination test - owners were benefiting more than the regulations allowed. I couldn’t contribute the government and plan maximum amount.

It become more beneficial for us to convert to a safe harbor plan than provided company $ to accounts for all employees regardless if the employee contributed to the plan or not. And the safe harbor plan allowed the owners to maximize their contribution.

I’m surprised that the 401k regs haven’t moved more toward a mandatory safe harbor plan

 

[MichealKnight]

Not saying I am for or against. However - as someone who had businesses and employees from non- college, non Club 401K backgrounds and no "HR department" I *will* say that many people - if it's not on their net pay, give a hoot. Taxes, payroll deductions, they dont think twice. Heck - that's part of the reason we take taxes out on payday - if people actually had to write a check end of year - - they'd think and, well, I'll let you, dear reader decide if the Machine really wants the public to think. After all, it's the culture and school system that made everyone so astute..... by design perhaps?

Back to 401K - if the contribution is out of their check - again - they just dont think about it. Yes, you'll have segments - that will be taking loans against it, all proud of "I'm paying myself back" thinking they are Goldman Sachs lol. But for the most part - it's a net-pay mindset.

There are many fine people - just trying like heck to make it. In good faith.

But, whether we want to hear it or not - there's many people - not in Club 401K......who honestly will wear their net worth on their car accessories, their haircut, and their vanity purchases every month.

Or week.

Heck some employers are offering daily paydays now.

 

[PatrickA5]

I'm all for making employees have to opt out instead of opting in. My DS new employer starts new employees with a 6% contribution and increases it every year until it reaches 10%. I talked my DS into just starting out his career at 10%. He doesn't even miss the money. It helps that his employer also matches 10%. Too many new employees never "get around to" starting up a 401K contribution and once they get used to a certain paycheck, they don't want to see it go lower.

 

[USGrant1962]

This is what separates the good employers from the bad.

My Kilocorp tried to use a local bank who was starting up a 401k business. Oh boy, that was a disaster. Every statement was followed up by another statement that corrected the previous. I don't even want to know what the fees were, it was over 25 years ago and I transferred it to a rollover IRA when I left Kilocorp.

Exciting times!

OTOH, my megacorp was a private company - one of the largest. The partners are all in the same 401(k) as the employees so it is really quite good, offering institutional share index funds with lower ERs than Vanguard. Public companies, like government, sometimes get an "other people's money" outlook.

I don't have a good suggestion for reigning that in. But jacking up transfer programs like SS in place of stock/bond market returns from a 401(k) is not it.

 

[Poopycat]

I would add a forth reason many people don't signup - It's too confusing.

.

Agreed. I was a naive kid who didn’t know anything about investing when I got my first full-time job. I knew investing was a good thing, mainly because my dad told me so, but if I had known more about investing back then I surely would have contributed more than the 3% I put down on the form. It wasn’t til I was in my late 20’s that I recognized the importance of maxing out the contributions to get the full match.

It’s my fault for not learning, I’m not blaming anyone for my lack of education on investing. But with this new law, it could get some youngsters to investigate why money is being taken out of their paycheck, and maybe it’ll spur some of them to learn and invest.

I also don’t think it would hurt for companies to do a tiny bit of education on the value of investment tools like 401k’s. I never had any company go through that with me. Now that I’m in a role with a little more influence, I’ve pushed hard to get an overview of the company’s 401k included in the campus hire onboarding program.

 

[punkinhead]

I also don’t think it would hurt for companies to do a tiny bit of education on the value of investment tools like 401k’s. I never had any company go through that with me. Now that I’m in a role with a little more influence, I’ve pushed hard to get an overview of the company’s 401k included in the campus hire onboarding program.

I worked at a Megacorp with a 401k run by Fidelity that got bought out by another who's 401k run by Vanguard. Vanguard came in and gave presentations explaining the tax advantages of traditional vs Roth, the company match, compounding, etc. The default investment for the rollover from Fidelity was a Target Retirement Date fund which I thought was a good match for most people who don't take an active interest. Overall I think Vanguard did a nice job with the transition.

 

[old medic]

In NC every full-time state and local government employee is mandated into the states retirement system and pays in 6% of your salary. Glad I didn't have the option to opt out.

 

[MRG]

Well, at least in prison they have shelter, food, and water, and I presume some semblance of medical care. That's a whole lot better than dying on the streets. I don't condone their (mis)behavior, but I still think humans should be treated better than feral dogs when possible.

+1
Sad but true.

 

[MRG]

Agreed. I was a naive kid who didn’t know anything about investing when I got my first full-time job. I knew investing was a good thing, mainly because my dad told me so, but if I had known more about investing back then I surely would have contributed more than the 3% I put down on the form. It wasn’t til I was in my late 20’s that I recognized the importance of maxing out the contributions to get the full match.



It’s my fault for not learning, I’m not blaming anyone for my lack of education on investing. But with this new law, it could get some youngsters to investigate why money is being taken out of their paycheck, and maybe it’ll spur some of them to learn and invest.



I also don’t think it would hurt for companies to do a tiny bit of education on the value of investment tools like 401k’s. I never had any company go through that with me. Now that I’m in a role with a little more influence, I’ve pushed hard to get an overview of the company’s 401k included in the campus hire onboarding program.

Probably a year after I was hired, a member of the leadership team in my department gave a presentation on the company's profit sharing plan. The main points were that it cost nothing, and Megacorp paid all the fees, based upon historical returns after 20 years, you would have a million dollars. I liked that. Sadly, when Y2K was a thing, if the company didn't have a 401k, it wasn't great for hiring. A decent 401k was added, pulling resources from the profit sharing plan.

But to your point, it would be great to advertise the great benefits to contributing.

 

[donheff]

Opt-out is a no brainer. Research over the years has demonstrated that inertia works both ways. If you go with opt-in, many employees don't and, as they get used to spending every dollar, become convinced that they can't afford to contribute. With opt-out many of those same employees get used to living without the extra bucks that go into the 401ks and, over time, see how big a deal those accounts are.

This is a paternalistic approach but so what? Every one of those employees is free to elect to stop all withholding at any time. Why not choose the option that uses our inertia to benefit us in the long run?

 

[Midpack]

I also don’t think it would hurt for companies to do a tiny bit of education on the value of investment tools like 401k’s. I never had any company go through that with me. Now that I’m in a role with a little more influence, I’ve pushed hard to get an overview of the company’s 401k included in the campus hire onboarding program.

That's unfortunate. Both the MegaCorps I worked for had 401(k) meetings once a year as far back as I can remember, usually put on by the admin (e.g. Schwab, Vanguard) - to explain how it works and how it could fit into a secure retirement (that SS wouldn't). Many employees didn't want to attend, but we made it mandatory. While we it was mostly preaching to the choir, or others who would never catch on, it was successful with a few employees every year. Even an employee who wouldn't listen at 25, might listen at 35 when he/she had a family. So annually seemed like a good practice.

It also helped to correct break room discussions that could get WAY off track in the course of a year, reset once a year. It was fun to have employees ask questions about things they'd heard from other employees, and to discredit the misinformed.

All companies that offer 401(k)'s should provide annual meetings.

My 401(k) was pretty large when I retired, and I am thankful for the company education I got from the start.

 

[Chuckanut]

In NC every full-time state and local government employee is mandated into the states retirement system and pays in 6% of your salary. Glad I didn't have the option to opt out.

Same for me when I got my first job as a public school teacher. They took about 4% of my income yearly and put it into a pension fund along with a matching contribution from the district. Also, my state did NOT opt-out of the Social Security system. So there went another 4-6% of each check to retirement benefits.

IMO, the ability for
states to opt-out of SS is a benefit for big spending politicians, and a negative for the workers. Illinois and Kentucky, I am looking at you.

 

[pacergal]

I think the requirement to opt out is much better. As others have said, many folks just look at the bottom line, Net amount in their paycheck. So if it starts out with money already pulled out and they know what their take home is, I believe they would be less likely to notice, and hopefully, leave the money invested over the years.

 

[old medic]

Same for me when I got my first job as a public school teacher. They took about 4% of my income yearly and put it into a pension fund along with a matching contribution from the district. Also, my state did NOT opt-out of the Social Security system.

To be clearer, 6% of our pay is taken pre-tax, and then matched by the employer. Can't opt out from either SS or the pension. Now you can quit, and get your money back, but just the 6% you put in.
Just now thinking about it... DW has around 42% of her paycheck going into 3 different retirement accounts, and we are going to bump her 401 up another 5 % next year. And still manage to put some money in the regular savings account..

 

[explanade]

Overall I think it’s a good thing by default as people aren’t saving enough for retirement. They can always opt out if they are determined.

It is but make no mistake, Wall Street is using political influence to get this in since they make billions in profits already from this sector.

Studies show auto-enroll is good, generally young workers learn to adapt to lower take home pay and get better at personal financial management.

But there could be situations where an employer picks an administrator only offering high-fee, actively managed instruments instead of index funds.

In that case, a worker who changes jobs could roll over their previous balance into an IRA but then if the new employer offers matches, they have to go with it, even if they will have lower returns from the higher fees.

I was listening to a podcast, they said the industry is now emphasizing wealth building or estate planning, rather than retirement planning, which is to provide enough to cover living expenses.

I remember at my company they had some retirement planning tool and you were to choose what percentage of your income you were targeting in retirement, so typically some percentage under your working income.

But like ER and FIRE, maybe workers are being given expectations for greater income in retirement than during their working years or at least wealth accumulation which will leave a legacy.

 

[athena53]

I agree with many of these points.

Opt-in makes sense. They can always opt back out. My main concern is that people who don't plan well will raid their 401(k)s and pay the 10% penalty- which they wouldn't have had to do with after-tax savings. For everyone who's motivated to keep money in the 401(k) due to tax consequences, there will be someone who discovers those consequences the following April 14. Others will find out that if they don't pay back their 401(k) loans within 60 days when leaving a company, it's also considered a withdrawal. Apparently some companies let you keep the loans there; others don't.

Yes, there are crappy plans. I was with a sub of Giant Enterprise from 2002 to 2006 and the 401(k) was awful. Most of the funds offered were proprietary funds from another subsidiary and the info available was pitiful. You could get on-line and see what they were worth today. Period. Oh, yeah- and there was company stock, too. I had tears of happiness in my eyes when we were sold and I saw the options offered by the acquiring company.

I am totally against beefing up SS to provide higher benefits. The government will always take more of your money in exchange for a promise to provide something in the future- except they can cut it back, eliminate it, tax it, etc. In the case of SS they'll also make sure those beefed-up benefits go to current recipients (even though it's not funded) or a certain very large lobbying organization will whine until they do.

 

[tulak]

I would add a forth reason many people don't signup - It's too confusing.

Most young people don't realize that it's the number of doublings that produces the big returns when a person hits retirement age. Start early enough and if you can add just one doubling the results are staggering. I sometimes show them a spread sheet that show how much more one can earn by starting an invest program at 20 instead of 30 years old. Sneek in one more doubling and it makes a huge difference.

Invest $2000 in an IRA, assume it doubles every 10 years.

End of:
1st decade - $4000
2nd decade - $8000
3rd decade - $16,000
4th decade - $32000

It's an eye opener to many young people I talk to.

DS thinks this way and he's in his early twenties. Lucky guy.

I had a later start to saving and agree that having an auto opt-in is a good idea.

 

[explanade]

Related to 401k accounts and speaking of bad 401k investment choices, apparently more plans are incorporating fund of funds which include private equity funds.

Private equity firms tailoring their products to casual workplace investors are winning repeated legal and regulatory battles in spite of critics who warn that unbridled funds threaten to undermine workers’ 401(k)s.

Intel Corp.‘s retirement plan committee defeated a class lawsuit this month that had been brought by employees challenging a suite of custom target-date funds invested in private companies. The U.S. Labor Department, meanwhile, mostly agreed in December to the terms laid out in Trump-era subregulatory guidance granting self-directed retirement plans permission to trade in off-market securities.

Investing in private companies outside traditional regulatory controls could make or break self-directed retirement portfolios, either leveling the playing field with wealthy investors or bogging down small-time savers with unmitigated risks. Until recently, those risks had outweighed the potential for big returns, but now companies say the pendulum is swinging in their favor.

https://news.bloomberglaw.com/in-ho...ity-firms-are-winning-the-fight-for-your-401k

Besides being more risky and outside of regulatory oversight, these PE funds carry higher expenses.

Casual investors would be one way of putting workers who for the first time have to make 401k decisions.

One would hope these new 401k account holders aren't auto-enrolled into these kinds of investments.

 

[Sunset]

I'm glad they will have the auto enroll.
I worked at many companies and I saw plenty of employees who didn't enroll due to many reasons and miss out on even the free company matching. Reasons like: didn't know, apathy, not understanding, mis-information, etc.

As for lousy funds, I was at some companies like that with high expense funds, but still with the company match it and the chance to save a lot, it was better than not enrolling, knowing I could roll it to an IRA when I left.

 

[HawkOwl]

That’s an excellent point. And like you I’m very glad to be in control of my financial future.

I’m certainly torn between my support for financial independence and my mistrust of the retirement “industry”. I wish there was a way of empowering as many people as possible but I don’t see this bill as a solution.

You may be right, but many people mistrust the government more than the financial industry. It may be misplaced, but who can blame them, with almost daily forecasts of ssc insolvency? Increasing ssc withholdings in return for an assurance of higher payouts later will be difficult to sell.

 

[braumeister]

I'm glad they will have the auto enroll.
I worked at many companies and I saw plenty of employees who didn't enroll due to many reasons and miss out on even the free company matching. Reasons like: didn't know, apathy, not understanding, mis-information, etc.

As for lousy funds, I was at some companies like that with high expense funds, but still with the company match it and the chance to save a lot, it was better than not enrolling, knowing I could roll it to an IRA when I left.

No question in my mind that this is in general a good thing. Of course there will be problems. I saw people take big loans out on their 401(k) accounts and when they were suddenly laid off they were in a world of hurt to pay those back immediately.

But looking at the big picture, this should nudge a lot of folks into better financial planning and that is more likely to be a good thing than a bad thing.

 

[CRLLS]

If I were King, I would not allow loans or early withdrawals n 401Ks or IRAs. Period. It is supposed to be for retirement. I mean, you can't take a loan out on, or withdraw from your future SS benefits. this would remove the temptation to make a foolish mistake. Yes, some people do need the money early. Those same people will need the money when they retire too.

Let those who are savvy and want to invest their retirement somewhere else, do so by opting out.

 

[Taxman59]

I worked at a private trust company. I was in charge of the accounting for the 401k plan (15 employees with a total value of about $2 million). The average balance was good ($133k), but there were 2 accounts with over $500k, and several more with over $150k. That left about 10 accounts with an average balance of about $20k. The company matched 5% of pay (you put in 1% and the company puts in 5%). I ran meetings semi-annually about the funds and how the employees would benefit in the long term with putting in just 1%. I pushed for people to put in 7-10%, but was seen as being pushy. The management and 2 others maxed out the annual contributions ($10k in those days). The staff (who were all college finance graduates who should know better) and the admin team put in the minimum (except for 1 who refused to put anything in since that means she would get a pay cut!!). After 5 years, I was in the top account size, even though there were several more who had been employed for 5-10 years before me.
No matter how much we tried to educate the staff (who all were in the financial industry!!), there were too many who felt that $$ in hand to buy another Starbucks coffee was worth more than anything in the 401K.

 

[brett]

One thing that shocked me as a senior manager was the number of employees who leave employer money on the table.

My employer had a matching pension scheme. Employer would match the ee's contribution up to to certain percentage. I was amazed at how many people opted out. Also, of those who opted in, very very few actually went into the plan to change their investment choices from one year to the next.

I gave up on getting employees to attend company sponsored retirement seminars. They were typically attended by those who had their finances under control and were working their retirement savings plans. The others did not want to know.

We had a great employee stock plan. Employees were guaranteed a 15 percent return every year. It was often more than that. I used it to make a lump sum payment on our mortage every year.

Is it any wonder why some people find themselves at 55-60 without the necessary retirement funds? One look at the consumer credit stats for people in that age group tells the story.

 

[livingalmostlarge]

I am all for it. I can't believe the number of people who don't use a 401k and barely save when given the option. People love having their paycheck and seeing more go away doesn't work.