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The 401(k) Automatic Enrollment Act of 2005

Background

Americans are not saving enough for retirement. In fact, the national savings rate is at its lowest level since the 1930s, declining from 9.4 percent in 1970 to just 1 percent in 2004. In response to these weak savings rates, we need to create new, simpler incentives for middle-class Americans to save.

Fewer than 40 percent of U.S. workers have calculated how much they will need to retire, 30 percent have not saved anything for retirement, and only 20 percent feel very confident about having enough money to live comfortably in retirement.

But there is some good news: Employers instituting programs to automatically enroll new employees in the company’s 401(k) plan have seen striking results. In fact, automatic enrollment – where employees are automatically opted in to the plan unless they act to opt out -- is the single most effective tool in achieving higher 401(k) participation rates.

Automatic enrollment has been particularly successful at increasing participation among those who most need the additional savings. Under auto enrollment, participation among those earning less than $20,000 a year has jumped from 13 percent to 80 percent.

Merely changing the position of the “on-off switch” – changing the “default” from non-enrollment to enrollment in the plan -- dramatically increased the rate of participation.

Yet, as of 2003, automatic enrollment had been adopted only by an estimated 8 percent of 401(k) plans, including about 1 percent of plans with fewer than 50 employees and 24 percent with 5,000 or more employees.

Automatic enrollment has appeal to both employers and employees: it gives employees a savings push while helping employers meet tax code non-discrimination tests. Although it has been sanctioned by the IRS since 1998, uncertainty as to design parameters has caused some employers to hesitate. New IRS guidance and this legislation should address any remaining concerns.

Legislative Provisions

This legislation will promote and facilitate wider adoption of automatic enrollment by:

  • Clarifying and codifying IRS rulings permitting auto enrollment, including advance notice to employees and the ability to “escalate” or increase the automatic enrollment percentage over time or when employees get pay raises;
  • Confirming that automatic enrollment is not restricted by state laws that bar employers from deducting amounts from employees’ paychecks without an employee signature;
  • Giving employers a measure of protection to ease their concerns about fiduciary liability for investment losses if the plan’s automatic (default) investments consist of life cycle or other diversified balanced funds (e.g., stocks and bonds, including index funds), stable value funds, or professionally managed accounts;
  • Giving automatic enrollment plans a comparative advantage in meeting 401(k) nondiscrimination standards;
    • the bill requires the use of autoenrollment if an employer wants to avoid those standards by merely offering an employer matching “safe harbor” contribution without assurance that employees will contribute and actually get the employer match.
  • Allowing plans the flexibility to “unwind” autoenrollment by paying out an employee’s account balance without distribution restrictions or penalties if the employee changes his or her mind and opts out retroactively shortly after beginning autoenrollment.

Press Releases and Floor Statements

  • 9/18/2007 - Emanuel Fights for Chicago’s Homeowners; Congress Responds to Subprime Mortgage Crisis
  • 6/14/2007 - Emanuel, Ramstad to Expand Retirement Savings
  • 8/22/2005 - Emanuel Commends Chao on 401(k) Efforts
  • 4/6/2005 - Emanuel Introduces Third Proposal in Savings Revolution
  • 4/1/2005 - Emanuel Announces Plan to Make Saving for Retirement Easier
  • 3/15/2005 - Emanuel Makes Saving for Retirement Easier with “Retirement Savings for Working Americans Act of 2005”
  • 3/3/2005 - Emanuel Makes Saving for Retirement Easier with the “Direct Deposit Savings Act of 2005”
Speeches


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