OUGHTA SAVE TO AUTO SAVE

Americans spend more money than they make, putting the country’s personal savings rate in the red. In a move that could help reverse this trend, Congress last month allowed companies to automatically enroll workers in retirement savings plans, such as 401(k)s. Automatic enrollment has been shown to boost participation in these plans, enabling workers to save more for retirement and other expenses.

According to a recent report by the Congressional Research Service, more employees participate in retirement savings plans if they are automatically enrolled than if the decision is left to the worker. Many people can’t decide how much to contribute to their 401(k) and how to invest the money, so they do nothing.

Last year, just over half of all U.S. workers were eligible to participate in what are called defined contribution plans, but only 79 percent of eligible employees participated in these plans. One survey cited by the Congressional Research Service found that participation rates were as high as 96 percent in companies with automatic enrollment plans, which shows that few people drop out of the plan, even if they are allowed to. The study did not include information on whether the amount of money employees saved in 401(k)s was higher with automatic enrollment.

The Internal Revenue Service has ruled on several occasions that automatically enrolling employees – both new hires and those already on the payroll – is fine as long as they have the option to drop out of the plan. The IRS said that amounts up to the maximum – $15,000, this year – could be automatically deducted from an employee’s pay and put into a 401(k). Employers who automatically enroll employees typically put in only 3 percent of an employee’s salary, not enough to build a real nest egg. To reduce risk, employers usually put the money into bond funds, money market accounts or stock funds that target an employee’s expected retirement date.

As part of a pension reform bill, Congress last month reaffirmed the IRS rulings and should prompt more companies to begin automatic 401(k) enrollment. The bill passed by Congress requires companies that do automatic enrollment to match the required employee contribution up to 3.5 percent of salary. Employees can opt out of the plan, and get their contributions back, within 90 days of automatic enrollment.

Automatic enrollment is a good step. Getting employees to put more than a minimal amount into their 401(k)s each payday is the next challenge.