http://www.investors.com/editorial/IBDArticles.asp?artsec=16&issue=20061226The two parties may be at loggerheads over the issue of personal investment accounts within Social Security. But legislation to encourage retirement accounts for low and moderate earners still might be on the agenda for the next Congress. The idea of providing universal access to 401(k)s and IRAs has appeal to both Democrats and Republicans. In the past session of Congress, sensible pension reforms got traction while Social Security reform went nowhere, noted William Gale, director of economic studies at the Brookings Institution. "It's possible that will continue," Gale said. Members of Congress may decide to "do the things we can do and the things we can agree on without getting mired down in topics" that defy bipartisan agreement. In the 2006 pension reform bill, Congress took steps to shield from liability companies that automatically enroll workers in 401(k) plans.
The logic of automatic enrollment is clear, said Heritage Foundation senior fellow David John. Participating in a plan requires workers to make three decisions that may pose challenges, particularly for those with modest incomes, he said. "Do I participate? How much do I save? And what do I put it in?" Under automatic enrollment, those decisions are made for you, though you can change the default selections. "Unless you say no, you will be in the system," John said. Research studies have shown that auto-enrollment could lift participation from about 70% to as much as 90% of workers provided with access to a 401(k), John said.
Opt-out 401(k) plans would have a much bigger impact on new employees, especially low-wage staff, boosting participation to 86% from the current system's 37%. Some proposals would go much further, expanding 401(k) and IRA access to the about 50% of workers whose employers don't offer 401(k)-type plans. This would provide workers with the simplicity of savings via payroll deduction. Under a proposal co-authored by Gale, Congress would require all but the smallest firms to automatically enroll new workers in a 401(k)-type plan, a traditional defined benefit pension or an IRA.
Their proposal also would provide for the automatic escalation of the default savings percentage over time, as income gains make greater saving possible. An automatic IRA plan co-authored by John would require any company that has been in business more than two years and has at least 10 employees to provide workers with such an account, if it doesn't offer 401(k) access. Under John's plan, employers would receive a small tax credit to offset the cost of setting up such an account. Workers would get a form that gives them the choice of opting out. These auto IRAs would provide workers a limited range of investment options patterned after the Thrift Savings Plan for federal employees. John said the idea is "noncontroversial" and would let Republicans and Democrats show they can work together and accomplish something important.
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