Amir Mehr is a self-employed business owner with a wife and two children. His life, both personally and professionally, is similar to millions of other Americans. In more ways than one. Mehr, 40, has done nothing to plan for retirement. He doesn’t even know what the most popular form of retirement plan, the 401(k), is. “I don’t have it and I don’t know how it works,” Mehr said from behind the register at his Reseda hardware store. Indeed, many middle-aged Americans are not saving for their golden years. One in five nearing retirement have no retirement fund. And nearly one-quarter of eligible employees do not participate in their company’s 401(k). Yet change is in the air. Automatically enrolling eligible employees in a retirement program is catching on and resulting in more people saving early. Starting in January 2008, employers offering automatic enrollment will receive government support to implement automatic “contribution escalations.” This means that employers can raise contributions by 1 percent each year to a maximum of 10 percent if the worker doesn’t opt out of the program, thus helping workers achieve a realistic amount to retire on. In general, companies already participating say workers have accepted auto enrollment and contribution escalation without rancor. Catching on While auto enrollment has been around since the 1990s, for years it was rarely implemented. Companies feared state laws against garnishing wages which turned out to be without merit, since employees could opt out of the plans. Another concern was that employees would file lawsuits after being placed without written consent in a failing investment plan, such as one including dive-bombing company stock. In an effort to encourage people to save for retirement, and to eliminate employers’ paranoia over lawsuits, Congress passed the Pension Protection Act of 2006. The act allowed companies to place 3 percent of an employee’s paycheck in a 401(k) unless the employee specifically opts out. The result has been a boon in 401(k) participation. “We anticipate that by the end of 2008, two-thirds of employers offering a 401(k) will be using auto enrollment,” said Elizabeth Piggot, regional director of Wells Fargo Institutional Trust Services in Los Angeles. Participating companies say retirement plans improve employee retention, and auto enrollment can free up human resources personnel who spend hours talking to new employees and filing paperwork about enrollment decisions. Auto enrollment can also satisfy nondiscrimination protections affecting retirement savings. The amount highly compensated executives can defer to their retirement plan must be proportional to the company’s lower-earning workers, a limit set by the Internal Revenue Service. The program helps balance a company’s retirement program. “The law requires that there be a balance,” Piggot said. “Adding auto enrollment opens that up so executives can realize the full benefit of the plan.” Yet retirement plans, let alone auto enrollment, are not practical for all businesses. Thirty-three percent of Americans work for a company that doesn’t sponsor a retirement package. Smaller companies struggling to supply healthcare coverage can seldom spring for a company retirement plan. “For small businesses, it’s impractical to offer it,” said Morrie Reiff, president of AFA Financial Group in Calabasas. “Most small businesses don’t want to incur the cost.” Employees accepting plan At Bosley Inc., a national hair restoration company with a consulting office in Westlake Village, auto enrollment began in January and has more than doubled participation levels to 89 percent. “We feel it gives us a better opportunity to fulfill the fiduciary responsibility we have,” said Bosley human resources head Michael May. Bosley, with 670 employees, has increased its retirement education programs, as well. “We are committed that they understand the value of the 401(k) program,” May said. Costco Wholesale, which employs 90,000, began auto enrollment in January 2005. Only 3 percent of employees have opted out, said Katherine Miller, manager of Costco employee benefits and retirement plans. The company has since adopted contribution escalation, raising a participating employee’s deferral by 1 percent each year. Miller is amazed how easily employees have accepted the program. “They haven’t called or said anything,” Miller said from the Costco home office in Issaquah, Wash. “So they either didn’t notice the deduction or were happy we took care of it for them.” At a Glance The Pension Protection Act of 2006 allows employers to automatically enroll workers in the company’s 401(k) plan. In January 2008, the “contribution escalation” aspect of the act goes into effect. An employee who doesn’t opt out of the plan will be automatically enrolled, meaning 3 percent of the employee’s salary will be deferred to retirement savings. Each year, a 1 percent increase up to a maximum of 10 percent will be implemented. Source: The Tax Advisor
