Senate Bill Encourages Employers To Implement Automatic 401(k) Enrollment

A bipartisan bill introduced in the Senate in June aims to boost retirement savings rates by: promoting automatic enrollment of workers in employer-provided retirement plans; allowing workers to transfer unused funds from Flexible Spending Accounts (FSAs) into retirement plans; permitting individuals to direct tax refunds into Individual Retirement Accounts (IRAs); and making certain annuity contributions tax free.

Senate Finance Committee members Gordon Smith (R-OR) and Kent Conrad (D-ND) sponsored the Retirement Savings and Security Act of 2005. "The face of retirement is changing and we have to keep up with it. People are living longer and traditional pension plans are becoming less common," Sen. Smith said. "We need to make it easier for people to save money, and give them better options for guaranteeing a steady source of income in their golden years."

The proposed legislation would offer retirement plan sponsors relief from nondiscrimination testing and top-heavy rules in exchange for adopting automatic enrollment, automatic deferral increases, an accelerated vesting schedule, and a specified contribution level. The bill also clarifies the legal issues surrounding automatic 401(k) enrollment, and calls upon the U.S. Dept. of Labor to provide guidance on appropriate default options for auto enrollment programs. According to Sen. Conrad, the automatic enrollment of workers into employer-sponsored plans could produce 5.5 million new 401(k) participants over five years.

Employees who use tax-advantaged FSAs to pay for health care would benefit from a provision in the bill allowing them to transfer up to $500 a year in unused FSA funds to a retirement plan or IRA. Electronic transfers of tax refunds into IRAs would also be permitted. The proposal, it is hoped, will encourage retirees to invest in life annuities by making a portion of certain annuity payments free from taxation.

In addition, the bill extends to 2010 the Saver’s Credit, a tax credit for low- and moderate-income earners who contribute to employer-provided retirement plans or IRAs. The credit is currently scheduled to expire next year.

The move to offer tax incentives for annuity investment was praised by retiree advocacy group Americans for Secure Retirement. "We applaud Senators Smith and Conrad for having the vision to recognize that true and complete solutions to today’s retirement security challenges will come not only from encouraging people to save more for retirement, but also by providing Americans with better tools for managing those savings so they last a lifetime," said the organization’s spokesperson, Shannon Hunt. "The inclusion of a tax incentive for people to put a portion of their after-tax savings in a lifetime annuity will go a long way toward providing true retirement security for all Americans."

The Principal Financial Group applauded the bill’s automatic enrollment provision. "The personal savings rate in this country is alarmingly low and trending downward," said Larry Zimpleman, president of Retirement & Investor Services at Principal. "The Smith-Conrad bill would encourage more employers to offer the auto-savings tools we know can help turn that trend around: automatic enrollment and automatic deferral increases. Those 'do-it-for-me' options have proven to dramatically increase participation and savings in employer-sponsored plans but unclear rules are preventing widespread adoption. By simplifying and clarifying complex regulations, this proposal paves the way for more employers, particularly in small and medium sized businesses, to put these successful savings tools into action."

The American Benefits Council also said it welcomed the proposals. "We hope this balanced, bipartisan legislation will quickly gather widespread support of other senators," said Council President James A. Klein. "The Council applauds Senators Smith and Conrad’s hard work on this measure and their commitment to preserving and protecting Americans’ retirement income security."

Klein added, "As the defined benefit pension system has declined, defined contribution retirement plans have grown in importance for so many Americans’ financial future. We know that … enactment of the Smith-Conrad legislation will encourage many more employers to offer these programs and help create a culture of savings in America."