Get ready for employee complaints of ‘forced’ retirement saving
September 11, 2009 by Kerry IsbergPosted in: Money, Pay and benefits, Special Report, policies
Don’t be surprised if you’re inundated with calls from employees confused about President Obama’s plan to “force” them to save for retirement through payroll deductions while living paycheck to paycheck.
The Administration’s latest initiative would expand automatic enrollment in 401(k)s and other retirement savings plans to make it easier for companies – especially those smaller and midsize firms lagging behind their larger counterparts – to sign up their workers and decide whether and how much they should save for retirement.
Under these plans, employers deposit a set percentage of each employee’s paychecks into his or her retirement account – unless the worker opts out, or chooses to invest a different amount. President Obama’s initiative will make it easier for employers of all sizes to adopt automatic enrollment by allowing them to rely on pre-approved language issued by IRS. Currently, plan sponsors typically must first get the agency’s written approval to amend their plans.
Here are two more features that may cause employee concern:
1. “Escalator” contributions. Employers will be able to gradually increase employees’ contributions over time, according to the plan design. Companies can set the increase amount, which will probably send unhappy workers scurrying to HR’s door to opt out, once they notice their paychecks shrinking. The just-released Revenue Ruling 2009-30 explains this so-called escalator feature.
2. Conversion of unused leave time into 401(k) contributions. Employers can set up plans to allow workers to convert certain leave time (e.g., current employees with expiring leave or those terminating with unused time) into contributions – and still comply with the complex plan regs. (See Revenue Ruling 2009-31 and Revenue Ruling 2009-32. ) The guidance also discusses when the amounts should be included in the former worker’s gross income. While this conversion option may appeal to higher-ups who can afford to save more, many rank-and-file employees leaving their jobs would probably still rather receive substantial cash payments.
So why the changes?
While these ideas may not excite cash-strapped workers, recent research has found automatic enrollment programs go a long way toward helping the nearly 78 million Americans who don’t have a retirement savings plan at work. The Administration says there’s a clear need because fewer than 10% of those without a plan at work formally save for retirement on their own.
For example, a 2009 survey by the Vanguard Group released last month found that automatic enrollment boosts participation dramatically. In fact, plans that offered the option had an overall participation rate of 84% last year, compared with 60% for plans that didn’t offer it. An earlier study by Hewitt Associates yielded similar results.
You can look here to read the Treasury and IRS rulings and materials, including more info on other savings options such as using federal tax refunds to purchase savings bonds.
September 14th, 2009 at 10:11 am
Wow! This administration is really all about control. It’s a little scary if you ask me. While I think the intent is good – getting people to save for retirement – the forced part is wrong. I think if people were more EDUCATED about saving for retirement you would have more participation. There is no program that really educates young people in their 20’s about the difference in starting the savings then vs later in life. Plus, with people thinking social security is there for them, saving on their own isn’t a priority. I think this is also a round-about way of saying social security benefits will not be available for most of us.
September 14th, 2009 at 10:48 am
Large employers have been usng automatic enrollment for some time, with good success. It worked well at my last employer – employees didn’t have to watch for the next quarter enrollment period and then “miss out” if they forgot to turn in their forms. They can always opt out if they don’t want to particpate.
September 14th, 2009 at 10:56 am
I don’t see how this is being “Forced” upon employees. If they can opt out then they have a CHOICE.
September 14th, 2009 at 11:05 am
I agree that I don’t like the government forcing people to do stuff, such as putting money into retirement accounts. What do you think is going to happen to all these young spenders who can have a 50″ HDTV, $400 phone with $150/month cell/data plan, and flashy new cars and iPods, etc when they get older? They are going to saddle the government (you and my tax money) to fund their medical care, “living” expenses (e.g. Social Security), etc. If the government will eventually have to step in to “take care” of these people (at other’s expense through tax dollars), then the government should be able to force them to put money aside. Education is important, but there must be some sort of mandate or the slackers and free-willers will opt-out now and will come crawling back for help later on.
However, my concern with any government program is mis-management (like the so-called “trust fund” that nobody can trust to be there because it is already spent and will actually be digging itself in the hole in about 15 years). Instead of a government-mandate that is funnelled through politician’s hands (like Social Security), just enact the requirement for certain threshholds and let the employee/employer decide how that money will be invested (within reasonable limits).
September 14th, 2009 at 11:13 am
I think this is fine as long as the company is very clear about the implications for automatic enrollment and what an employee will need to do to opt out.
September 14th, 2009 at 11:47 am
As long as there is an opt out option I think it is a good idea. I anticipate that we’re going to see more and more people suing their employer because they were not prepared for retirment in our world of 401k/403b vs pensions. We need people to take responsibility for their future. If that takes forcing them to take action to opt out instead of opt in, so be it. We might actually help a few people who would normally have done nothing.
If someone has an effecitve way to communicate to people to get the message across I’d love to hear it. I’ve communicated in every fashion and still people come to me ready to “retire” only to realize that since THEY haven’t saved for retirment there is nothing available.
September 14th, 2009 at 12:37 pm
What kind of silly statement is this….automatic enrollment boosts participation dramatically.
Of course it does. How many workers will keep track of the date they need to opt out by? How many will remember but still not opt out until the first deduction? So of course participation will dramatically increase….at first, then it will go right back down to there original levels. All who do not want to save this way will opt out and create nightmares for the HR and payroll people trying to get back that involuntary deduction.
September 14th, 2009 at 1:16 pm
I don’t understand what the big deal is about this subject. We recently went to auto-enroll for 401(k) and have not had any problems. So, we are doing now what the administration wants to achieve. Like the article mentions, employees do have a choice…they can opt out or change their conrbituion (increase or decrease).
September 14th, 2009 at 1:17 pm
The work above is “contribution.” Sorry about that.
September 14th, 2009 at 1:42 pm
I agree with Albert. You will only have temporarily increased numbers. If ee’s want to contribute, they will. Otherwise they will opt out (after they have made a payment or two) and you will have numerous accounts with $50-100 account balances just sitting there. They won’t be able to close the account until they are 59 1/2 or terminated, and that will upset them.
HR is all about looking after the employee’s best interest, AND the companies best interest also. Most retirement accounts won’t let you participate until you are at least 18 (ours is age 21). At that age, you are an adult. The government should back off and let citizens be the adults that we are. We teach our children to be responsible and to do the right thing. The government is trying to be a parent to every person in the USA. The government needs to back off and let the people be responsible for themselves. Be proud of your accomplishments; learn from your mistakes; be responsible for yourself and your actions – do NOT expect or demand support/hand outs from any person or group.
My wise father (with only an 8th grade education) taught me “Nothing in life is free. If it looks free… you better look for the strings that are attached and know what’s on the other end!” He has more common sence than a lot of people I know. He taught me to be responsible for myself and to stand on my own two feet. If everyone would do that, we wouldn’t have half the problems that we are facing today.
September 14th, 2009 at 2:06 pm
This plan if enacted could have a negative effect on employee’s. How? Many cash strapped companies may decide to no longer match employee contributions due to the enormity of additional participants in the plan. Who ultimately gets hurt in this type of legislation … the same employees that the government was trying to protect.
If the legislator’s were prudent, they would offer major tax credits / write-offs for those companies that match contributions at the same time they announce this legilation, if enacted.
September 14th, 2009 at 2:18 pm
I don’t know about anyone else, I live in the United States of America. The government does not enjoy the “right” to force me, a private, working citizen to save money for ANY reason. The government can not balance their own checkbook; who are they to say what I should do? Government control for “the good of the people” is NOT in our constitution. Quite the opposite. The legislature has no business in this. What has happened to the idea of our Republic and God given free-will?
September 14th, 2009 at 2:50 pm
Nicely put, Janie.
September 14th, 2009 at 3:21 pm
I agree 100% with Janie. If I want the governments help with my finances, I will go sign up at the local welfare office. Since I choose to work for a living, what I do with my money is my business.
September 14th, 2009 at 4:08 pm
Even if it is a choice of the employee to enroll or opt out, the company will still be burdened. It isn’t, nor should it ever be, a company’s obligation to handle this. Responsibility needs to stay where it belongs…for the employee to plan for their own financial future. If a company wants to voluntarily set up a program for its employees thats fine as long as it is not required for a company to do so.
September 14th, 2009 at 4:16 pm
I wish this had been in effect when I was 20 years of age. I am sure I would be a lot better off having started at a younger age then I now am at age 60. Someone above mentioned education and that is key but it has to be the right kind of education. It needs to be shown in black and white what it can mean to your future. I did this for my son and he saw the potential and started contributing at age 24. Think where he will be at age 60 or 65. We have an automatic plan that employees can opt of if they wish. The default is 3%. They start and they stay in the plan. I encourage them to increase a little bit at a time and they do. We have not had employees dropping off. They know the imprtance of their future retirement. It think automatic enrollment is a great idea and will be great for everyone even if they don’t know it right now. There is nothing sadder than an old retired person with no money.
September 14th, 2009 at 4:18 pm
I agree with Mary – we’ve had auto-enroll for 401(k) for years – with the yearly escalation feature – and it works well for our organization and employees. Many of our employees have actually thanked us for having this feature which helps them save for retirement – some say they just never “got around” to saving for retirement on their own.
Unfortunately, too many people do not save enough for retirement, and auto-enroll is one way to help ensure that more do.
I’m glad that the government is looking at this feature. Like the article mentions, employees have a choice…they can opt out or increase/decrease their contribution if they want.
And remember that the majority of these plans are administered by employers, not the government.
September 14th, 2009 at 4:34 pm
I must admit, like Mary D, I am confused. What is the big deal? Since this is an HR site I would assume the readers are HR professionals. As such, they should be well aware of the automatic enrollment option in 401K’s. My company (small to mid size) has been doing it for over a year. The money is still the employees’ money, they can invest it any way they want to, and yes, they can change or stop their contributions. This is not a government program in any way shape or form – oh, except for the tax break the employee gets.
And Janie, I hate to break it to you, but the government is forcing you to save money – it’s called social security. I’m sure that when you reach your retirment age you will gladly return that money to the government since you didn’t want to save it.
September 14th, 2009 at 4:48 pm
Janie, KP and Rita, I think the three of you missed the detail about opting out. Nobody is being forced.
September 14th, 2009 at 5:28 pm
I agree with Ravi, Nicole, and Mary D. Companies have been using auto-enroll for 401(k) plans for years now. The only thing the administration is doing is creating some new auto-enroll options and putting forth more standard language for the plan documents. Plans still have to get an IRS determination before they can enact an auto-enroll feature in their plans. And auto-enroll can cut down dramatically on the hassle of documenting that all your eligible employees were notified about their eligibility to participate and that non-participants waived participation. If it’s well communicated, an auto-enrollment for 401(k) can be a very convenient feature for employee, as well as plan administrators.
September 14th, 2009 at 6:43 pm
What I find humorous is the authori’s title: Get ready for employee complaints of ‘forced’ retirement saving. Does anyone know what the ‘ ‘ around the word forced indicates? It is not REALLY forced, folks. That’s why the word is in quotes! There is an opt out. Geez!
September 14th, 2009 at 9:36 pm
What a nice way to allow the rich to shovel more money into their pockets to play marbles with and go oh well its just the markets fault. Ie: our S.S money like the move Gone With The Wind
No way do you allow this people Education is correct if you like hunting alum cans then so be it
your decision.
September 15th, 2009 at 6:53 am
It is certainly easy to spot the HR professionals from the newbies! Jenny, Ravi, Nicole, Mary D., you are all right on target. Auto enroll is a great feature for our employees and plan administrators. And if the feature to invest unused time off is available to offer our employees, I know many employees will think of that as a benefit. These are the employees who have 5 weeks or more of vacation to use with a “use it or lose it” policy. I see these folks scrambling to take time off before they lose it at the end of the year. To be able to convert that time to dollars that will go in to my 401k? Sign me up! I think a certain group of people need to stop listening to the crackpots of this country and get on with things!
September 15th, 2009 at 7:22 am
Americans need to realize we cannot have it all. They do not want to save for their own retirement yet will whine and complain of the government tries to raise the amounts we are charged to fund Social Security and other government based programs which would support them when they retire. Social Security will not exist when most of the work force retires. Those people need to think how they are going to live during their retirement years. It is not MY responsibility to fund their retirement, it is their responsibility.
September 15th, 2009 at 8:13 am
Rose, I couldn’t agree with you more.
In reading all of these responses, it sounds like forced government retirement saving is something new. I fully agree that it is not the governements responsibility to make people save for retirement but, we have had a forced retirement saving program for years. It is called Social Security in the form of a tax. The big difference between 401(k) and Social Security is that the money you save is yours, not the governments.
Wasn’t President George W. Bush working toward a variation of social security where your money was yours and his plan was met with opposition?
Personally, I am having a problem putting money into a program that will not benefit me due to being bankrupt…
September 15th, 2009 at 8:26 am
I don’t see what the big deal is either. We use auto-enrollment and it has been a boost to our company. Not only does it help with issues like discrimination testing (which, btw, if you fail, ALL participants in the plan may be negatively affected), but it also offers to those folks who don’t necessarily understand how 401(k)s work a fabulous opportunity to ask specific questions, those who don’t sign up because they “don’t have the time” a chance to participate, and really opens the lines of communication more than simply sending communications and holding meetings, etc. Employees can opt out. And so what if the employer does not match funds, or stops matching funds, it is still a chance for employees to put aside pre-tax money for retirement. If an employee does not want to participate they do not have to. As far as being more administratively difficult for HR, well is that a reason not to support a program that could help secure an employee’s future?
September 15th, 2009 at 10:21 am
I think that what most people are objecting to is the fact that the government is going to “force” employers to have auto-enrollment plans. Yes, the plans may work great, but how many of your companies provided it because you had to? A better approach would be to educate more employers on the benefits of the auto-enroll 401(k) so that they would voluntarily start one.
I am a little firghtened by how the government, whether democratic or republican run, is gradually taking away our ability to make choices. It’s for our “own good”, really. I was raised on the premise that you have to support yourself, sometimes with the help of family and friends. It is not the government’s job to take care of me – they are neither my family nor my friend.
September 15th, 2009 at 11:15 am
We added auto enrollment last year with very little pushback and opting out. We have mostly lower paid line workers and it helped immensely to have face-to-face meetings to go over the benefits of the plan and getting started. I believe it depends heavily on your workforce. In my prior company we were an engineering consulting firm and they would have fought back fiercely if we tried this kind of program as an insult to their intelligence. With this group most of them appreciated the idea and some wanted to know how to contribute more. We start at 3% and escalate to 6% in 4 years as prescribed. We did not have to file for an IRS approval so I don’t know what the Pres is talking about with the statement about making it easier. It’s already easy. If the govt would eliminate the testing provisions you would see a lot more happy participants. This provision helped our testing a lot and that helps sell it to the leadership of the company. They get to keep more of what they contribute with the tradeoff of some additional match. In So Cal our HCEs are not highly compensated so this is a big plus to more than just upper management. I have been in retirement plan business almost 25 years and auto-enroll is one of the better ideas to come out for 401k plans.
September 15th, 2009 at 11:29 am
All eligible employees at our company must complete a contribution election form, indicating their contribution amount. If they do not wish to participate, they indicate a contribution amount of zero. The same thing applied to my last employer. I’m not sure how O’Bama’s plan would complicate this. For what it’s worth, both companies had about 150 to 200 employees.
September 15th, 2009 at 12:48 pm
We already have forced retirement savings it’s call FICA.
September 16th, 2009 at 7:49 am
The option of auto-enrollment in our 401K was made available to us when we changed providers. One of the main selling points of doing this was to help our higher compensated employees make larger contributions to their accounts with greater participation by our lower compensated employees. This takes 401k out of the “benefit” arena. Leave participation in 401K where it belongs – at the request and desire of the employee. The government needs to stay out of it.
September 16th, 2009 at 3:33 pm
Jeffery – You are right – We are forced to FICA. When I was reading all the replies above, I was looking for FICA. How about this: if you put money with required minimum to 401K, then you don’t need to pay FICA? We are old enough to take care of ourselves.
September 16th, 2009 at 4:32 pm
I will never contribute to a 401(k) plan again. Not after Amercians lost over half of their savings in the stockmarket crash. I put extra money on my house payment. No one can take that away from me. We have auto-enrollment, but most of our employees opt out. There’s no trust in the market or the dollar these days.
September 17th, 2009 at 10:02 am
I’m ok with the auto enrollment, but the escalator factor gives me heartburn, unless you can auto “de-escalate.” Why doesn’t Obama clean up his own issues before trying to meddle in our personal affairs….it appears he isn’t doing well at either. If you hear I’m from the government and I’m here to help you…run the other way!
September 18th, 2009 at 10:38 am
Just a few quick things from someone who work in the Retirement Plan Industry:
*No one is being “forced” w/auto enrollment – you can opt out…. but isn’t it human nature that we never want to complete paperwork? So, this helps those who won’t fill out the form to save for retirement.
*Mc Donalds was the first co. to be credited w/starting auto enroll years ago…. but in 2006, the Pension Protection Act pre-empted any state laws regarding payroll deductions without authorization & said auto enrollment was ok.
*Years ago, Roosevelt said Soc. Security was never meant to be the sole support for retired individuals – its a 3 legged stool – social security, retirement plan, and personal savings.
*We don’t know if (or to what degree) social security will be there for younger people (myself included)…. the Administration knows it — so is making it “easier” to help companies help their ee’s.
*A retirement plan (whether there are any employer contributions or not) – is an employee benefit & there are costs & HR/personnel work associated w/it — and I don’t think ee’s always realize that.
*When I meet w/ee’s, I DO try to encourage them to participate – even if its only $5 or $10 per pay… its easier to continue or increase savings once you’ve started…. and we do show them numbers — of how saving “early” can make a difference in your nest egg.
I could go on & on… but bottom line — more and more, the burden of saving for retirement is on the employee…. and this is one way to help it along….. the next step (and one of my personal goals) is to help encourage employees to “not” take the cash & spend it when they change jobs!!!
I agree w/Flel — not sure what the idea being “no approval” is all about – I have to research…Pension Protection Act of 2006 opened the doors for auto enroll.
September 21st, 2009 at 3:49 pm
I am kind of new at HR and benefit admin/ although I’ve been doing payroll for years. I am kind of torn, because I like the idea of a 401K plan. We currently don’t have one at all, being a small company and I am hoping that my employer will soon make these changes. For small businesses this may be difficult to accomplish. Most of the comments in favor of this idea are those that have this already in place. However, I do enthusiastically agree that the government should stay out. The reason is simple: THEY’VE ALREADY TRIED THIS; ISN’T THIS HOW THE SS SYSTEM STARTED? I wasn’t around when Social Security was established so correct me if I’m wrong, but I believe it was set up on the same principle; SOUNDED GREAT, BUT WHOA NELLIE.., LOOK AT WHAT’S GOING ON NOW.., It’s now just another TAX desguised as a “retirement savings plan”, this is my biggest fear. And a comment was made that people may not have this available to them when they retire: this is why I say – TAX. We pay for it, but can used it, the government uses it; sounds like TAX to me. What is to prevent them from doing this again in the future with the 401K plan?
I really like the idea of keeping it in the private sector away from the government control. More education would be great, and more security for the people would be great too.
October 5th, 2009 at 12:21 pm
In reply to Melissa… We do not have auto-enrollment and have always had over 90% participation in 401K. People will enroll if they wish to participate. Auto-enrollment because “people will forget to do the paperwork” is another insult to employees. What you neglected to touch on is how auto-enrollment helps the mare highly compensated of the organization. Taking more decision making away from people is the last thing this country needs.
October 15th, 2009 at 12:43 pm
Since schools dont seem to teach much on money management, young adults must learn the importance of savings through life experience. Rare is the retired person with TOO much money. Ask most – they’ll tell you that they wished they would have saved more for retirement.
This is not a forced action. It merely allows employers to set the tone regarding the importance of savings. Most of the new employees (young&old) at our company go along with the auto-enroll. They quickly learn the value of savings. I LOVE the idea of removed FICA deductions if a person can demonstrate retirement savings on their own. Too bad the govt needs our FICA money for yesterdays expenditures.