President Obama has big plans for changing company-sponsored retirement plans, especially for small businesses.
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.
BusinessBrief.com delivers the latest business news once a week to the inboxes of over 180,000 executives.
Click here to sign up and start your FREE subscription to BusinessBrief!
advertisement
Tags: 401(k), Hewitt, retirement, Vanguard
September 17th, 2009 at 3:24 pm
I see this as a way the democRATS will attempt to tax IRA’s and 401-k’s later as they proposed to do several years ago.
September 17th, 2009 at 5:35 pm
When will the people learn that the more the government gets into your private business, the more you lose and they gain. Remember what happened to those 401Ks just a few short months ago? I would not allow the government to get involved in any plan that is offered to my employees. At this point, I just do not trust the Obama administration and the programs it has tried to pass including the cap and trade, the stimulus, the nationalized health care, and so many others. If the employees do not like the way we operate, they can leave the company.
September 17th, 2009 at 6:17 pm
I agree LEU. Irresponsible government spending and the inability of the Feds to restrain themselves in any fashion makes most folks skeptical about any so-called “reforms”. The mounting national debt and runaway social programs set the stage for the Feds to justify borrowing or taxing your 401(k)s, Roths, or any other savings programs they can get their greedy hands on. I’ve stopped contributing to my 401(k) and choose to allocate that money for other things like paying down my mortgage.
September 17th, 2009 at 8:02 pm
There are no current proposals for additional taxes on retirement plans but there is a fair amount of research that indicates many American’s are not being personally responsible and saving enough for retirement. My last 401(k) plan offered the “escaltor contribution” which many employees percieved as a benefit. Employees have the option to opt out. It is the employers responsiblity to administer the plans and provide employees information. I’d save my complaints until there is something actually proposed that is worth complaining about.
September 18th, 2009 at 11:20 am
Before doing something like this there needs to be a method for removing employees who leave. Right now an employer can not force anyone to cash out of their plan (pre-retirement age) and employees sometimes disappear so trying to contact them becomes impossible. All this leads to eventually building an account with more than 100 participants triggering a mandatory annual audit which is very expensive ($8,000 to $10,000)
In addition the discriminatory test should be abolished. It’s patently unfair to small businesses who most always have a disproportionate amount of Direct labor to Management compensation. This causes a test failure every time and forces the high earners to take money out of their accounts.
If the max allowable pre-tax deduction per person set by the IRS is the limit then why a special additional one on a ratio that penalizes Management staff. I know there’s a “Safe Harbor” clause that negates this but that adds serious expense from a company contribution side so most can not afford to do it.
It’s ridiculous. I’ve complained about this for years. No one in congress has any appreciation of what small business has to confront.
September 18th, 2009 at 5:17 pm
Jerry A. Grunor Says:
“If the employees do not like the way we operate, they can leave the company.”
Actually, many if not most people cannot leave their job, or they will lose their health care, which is a HUGE expense (for most people only their mortgage is higher). If we had a nationally offered, government run plan (like Medicare, government employees, police, teachers, etc all get and is paid for by the rest of us), then it would be possible for people to leave your company.
And Obama’s plan is nothing like “nationalized health care” – if you think so you don’t understand what he is proposing, or what “nationalized health care’ means, or both.
The lack of portable health care (because it is tied to employment) is fossilizing employment, and hurting American workers and business.
Obama’s plan is not perfect, but it is a step in the right direction.
PS – I am a small business owner, and will pay more taxes under most of Obama’s plans. Okay with me if it helps solve these huge problems for our country.
PPS – If Thomas Jefferson had taken your advice about keeping the government out of private business he would never have made the Louisiana Purchase, and the USA would still be a strip of land clinging to the east coast of North America, with huge French and British powers west of the Appalachians!
From Wikipedia:
The American purchase of the Louisiana territory was not accomplished without domestic opposition.
The Federalists strongly opposed the purchase, believing the purchase to be unconstitutional.
The United States House of Representatives also opposed the purchase. The House called a vote to deny the request for the purchase, the vote failed by two votes 59-57.
The Federalists also feared that the political power of the Atlantic seaboard states would be threatened by the new citizens of the west, bringing about a clash of western farmers with the merchants and bankers of New England.
A group of Federalists led by Massachusetts Senator Timothy Pickering went so far as to plan a separate northern confederacy, offering Vice President Aaron Burr the presidency of the proposed new country if he persuaded New York to join.
Burr’s relationship with Alexander Hamilton, who helped bring an end to the northern secession movement, soured during this period.
The animosity between the two men ended with Hamilton’s death in a duel with Burr in 1804.
Isn’t history amazing the way it repeats itself??? What would our country be like if Jefferson had caved to the Federalists?
September 22nd, 2009 at 10:38 am
every one should have a saving plan, just good management, for the later years of life, but keep the current government out of it, I did not and my saving are down 56 % and dont every expect to get back to break even, that could change after 2012 and it could worse, Look at the stockeholders with GM, saving gone and the government and the union own GM, and the saving plans that attached to some kind of insurance company is no better, lose/lose. Taxes, you are going to pay taxes on the benefits of your saving, Most taxpayers and people that manage to save, can not agree on the Obamma plann, those are not his people Pepole that have money dont believe in socialism, they work for it, and it does not belong to anyone else.
September 22nd, 2009 at 2:43 pm
Some people should not open their months let along put fingers to keyboard… lion acts like he’s blaming the current administration for his losing 56% of his ‘savings. If he’s at all knowledgeable, he would know that pure greed (relying on Wall Street and the Real Estate market to regulate themselves) occurred during the prior administration which is why this country is the shape its in. The auto companies started sending jobs outside the US over 10 years ago to combat high union wages and benefits. Perhaps if the workers had been more reasonable those jobs might still be here. IRA’s and 401(K)’s (unless they are Roth) have always given a tax break now and aren’t taxed when withdrawn.
It’s great to say NO to big Government until you’re in a natural disaster or suddenly 66 and can’t possibly live on Social Security but have no other savings!
September 22nd, 2009 at 3:48 pm
Why is anyone upset about this? Employees have the right to opt out…….lets tone down the political retoric
September 22nd, 2009 at 4:08 pm
SER proves his (or her, or its) point that he (or she or it) shouldn’t put fingers to keyboard.
1. Greed didn’t cause the situation we’re in – it was government involvement in the mortgage and banking industry. See: CRFA, Fannie Mae, Freddie Mac, and Barney Frank and Christopher Dodd’s neglect of the Senate and House Banking Committees.
2. The prior admin wasn’t totally absolved, but the CRFA began w/ Jimmy Carter and was built up by Clinton.
3. Over 20% of the price of a new Chevy goes to retiree union benefits, more than the price of steel in the car. They should have sent more jobs overseas. Why is Honda, Nissan, and Toyota doing well? They have no union employees.
4. IRA’s and 401-K’s are indeed taxed when withdrawn.
5. Social Security is the biggest fraud ever perpetrated on US Citizens. If I came into your company and wanted to provide you with a retirement plan which would take 16% of your earnings, wouldn’t allow you to pass it on to your heirs when you die, wouldn’t invest the money in any reasonable mutual fund plan, and could change the withdrawal age arbitrarily, and not guarantee you’ll even get back what you paid into it – you’d have me arrested. But that’s social security. If you are depending on SS in retirement, you are an idiot.
6. Anyone depending on the federal gov’t in a disaster deserves what he (or she or it) gets.
September 22nd, 2009 at 9:16 pm
Leu, you are right on target and what SER failed to mention was that the liberial controlled congress was incharge for the past two years of the last administration, What is fair about breaking the stockholder and giving the GM to the union and the government, On Social Security, it was Lyndon Johnson that transfered the SS fund to the General fund, and with that control the SS fund will always be broke, the government always funds just enough to keep it going. SER needs a lesson in 401K, IRA and on what is taxed and what is not. The controlled liberial congress cause the banking problem, and in an election year, does not look good to try and stop low income people with a weak pulse from buying a first time house, and come last Oct, when it was evident which way the party was going, so you have a mass lay off, and for each tax dollar increase, more lay off, just the start
October 19th, 2009 at 8:00 pm
LEU: Funny how conservatives hate government regulation and then blame it on the Democrats when there wasn’t enoug regulatioh! And “the prior administration wasn’t totally absolved” – it’s not like that administration was there 5 minutes – they had 8 years.