New Rules Push Workers Into 401(k)'s

New employees who don't enroll in their company's 401(k) plan next year may find themselves saving for retirement anyway. A new law making it easier for companies to automatically enroll their employees in 401(k) plans goes into effect December 24. Many employees will now be given the choice to "opt out" of their company's default 401(k) plan rather than "opt in," as they do now.

One third of eligible workers currently don't participate in 401(k) and other defined-contribution plans, which give employees the option of investing their own retirement funds and often their employer's matching amount in a choice of stocks, bonds, money market funds, and other investments. Automatic enrollment could reduce that figure to less than 10 percent, the Department of Labor estimates.

Last year's Pension Protection Act gave the OK to automatic enrollment. Now new federal rules spell out how it will work: Employees will first be given the chance to pick their own retirement investments or tell the company they don't want to participate. But if the company gets no response from an employee, automatic enrollment will swing into action. A second notice will tell the worker how the company is investing a portion of his paycheck. Such a notice will be sent every year.

The company will have several options. It may automatically enroll participants in a mix of investments that grow more conservative as the participant's retirement date approaches, such as life-cycle or targeted retirement date funds. It can direct employees to a professionally managed account or investment service that will provide an age-appropriate asset mix. Or it can select a product like a balanced fund that provides investments suited to the entire group of employees. Balanced funds, with $348 billion in assets, made up almost 13 percent of 401(k) holdings in 2006.

Employers may also park workers' retirement stash, but only for the first 120 days. Money market funds, stable value products, guaranteed investment contracts, and the like are generally off limits to automatic enrollments unless they are part of a qualified investment portfolio. Variable annuity contracts or other pooled investment funds are allowed, but direct investments in company stock generally aren't.

How much automatic enrollment will help employees save for retirement is uncertain, of course. An Employee Benefit Research Institute and Investment Company Institute model found that a contribution rate of 6 percent and an asset allocation in life-cycle funds produced positive results among all income levels. Under the new rules, participants may move their money out of company-selected investments at least quarterly with a minimum of fees.

The new investment rules apply only to new contributions. Total assets in 401(k) plans amounted to $2.7 trillion in 2006, according to the Investment Company Institute.