The Save More for Retirement Act of 2005 (S. 875) was introduced last week in the Senate by Senator Jeff Bingaman (D-NM). Here's what he had to say on the Senate floor when he introduced the Bill:S. 875. A bill…
The Save More for Retirement Act of 2005 (S. 875) was introduced last week in the Senate by Senator Jeff Bingaman (D-NM). Here’s what he had to say on the Senate floor when he introduced the Bill:
S. 875. A bill to amend the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 to increase participation in section 401(k) plans through automatic contribution trusts, and for other purposes; to the Committee on Finance.
Mr. BINGAMAN. Mr. President, I rise today to introduce the Save More for Retirement Act of 2005 with my colleagues Senator Snowe, Senator Lieberman and Senator Obama. This legislation is designed to achieve two important savings goals. First, it will encourage workers who are not currently participating in their employer’s retirement plan to do so. Second, it will encourage workers who are currently investing in 40l(k) plans to save even more. At a time when national savings is at a near all-time low, Congress needs to look at ways to expand retirement savings, particularly savings garnered through an employer-provided retirement plan. This legislation is a commonsense approach that is based on research undertaken and compiled by a host of retirement policy experts from both academia and business. It is imperative that the Congress continues to look for new and innovative ways to help workers save for their retirement through the existing employer-provided plan system. This legislation accomplishes that goal by creating incentives for employers to modify their existing plans to add features that have been proven to increase savings.
The first step is to encourage employers to add a feature to its 40l(k) or similar plans to enroll its employees in the plan upon being hired unless the employee notifies the employer that he or she does not want to participate in the plan. The decision to participate still rests entirely with the employees, as they can opt out before participation begins or at any time afterward. Although some employers do offer these types of plans now, most maintain a more traditional structure under which the employee must opt into participating. Studies have indicated that such a seemingly minor change in how employees are enrolled can dramatically increase participation rates. It has been reported that one large company experienced an increase in employee participation in their retirement plan of 50 percent once the features were changed to automatically enroll its employees. Clearly the first step towards increasing our national savings rate is to get more people saving.
Obviously the second step is to get those who are saving to set aside even more for their retirement years. For this reason, the legislation would encourage plans to add a feature that increases employees’ contributions annually until it reaches at least 10 percent of the employees’ compensation. Again, studies have repeatedly demonstrated that people are more likely to agree to save more in the future than they currently do. It has also been demonstrated that people are more likely to agree to save more in the future if they make the decision today and do not wait until future years to make that decision. In our legislation, the employee can stop a future increase or change the contribution rate. The employer has the discretion to tie these automatic increases to either an annual increase or to increases in salary or compensation. This is closely modeled on the Save More Tomorrow, SMarT, plan advocated by Shlomo Benartzi from UCLA and Richard Thaler from the University of Chicago. These behavioral finance experts claim that although participants in this plan may start saving at a lower rate–3.5 percent–than the average, within 4 years increases averaged 13.6 percent–a greater than 10 percent increase. Compared to the control group saving rate of slightly more than 8 percent of their compensation, the end result is quite extraordinary.
To encourage employers to make these two changes to the plan, the legislation creates a new safe harbor that, if all the criteria are met, treats the plan as being nondiscriminatory. In order to qualify for the safe harbor, the employer must provide either a nonelective match of 3 percent of the employee’s compensation or an elective match of 50 percent of the first 7 percent of the employee’s compensation. These criteria can be met also if the employer contributes a comparable amount to another qualified plan for the same employees. The employer must also allow its contributions to vest in either 2 years, if the employer enrolls the employees in its pension plan before the employees’ first paycheck, or in 1 year if the employer enrolls the employees within the first quarter of being hired. It is important to note that both of these vesting periods are shorter than current law allows and are comparable to what employers can do under the existing safe harbor.
Finally, in an effort to help ensure employees are invested wisely, the legislation directs the Department of Labor to provide guidance for employers in selecting “default” investments so that employers have options besides money market accounts and investment contracts. A default investment is the investment that is made when employees fail to indicate how they would like their retirement savings invested. Due to liability concerns, retirement plans tend to invest these funds in either investment contracts or money market accounts. The benefit of compounding interest that would occur with even modest returns in broad-based funds that have an equity component is lost. This guidance will not allow employers to make default investment decisions that are risky or put the employee’s retirement at risk. It is important to note that the employee always retains the ability to invest the funds differently in other investment options offered by the plan if they do not like the default investment offered by the employer.
I thank all of those who have done considerable research into the impact of human behavior on savings, which was quite instrumental to the drafting of this legislation. I look forward to continuing to work with them and others interested in this new approach to addressing our Nation’s savings problems.
I ask unanimous consent that the text of the bill be printed in the RECORD.
The American Benefits Council has provided talking points and a summary of the legislation.
The Profit Sharing Council of America has issued a press release lending support for the legislation.
Similar legislation was introduced in the House earlier in the month by Rep. Rahm Emanuel [D-IL] under a different name–“401k Automatic Enrollment Act of 2005 (H.R. 1508).“
Also, you can access the CRS Report for Congress (October 14, 2004) on the topic of automatic enrollment in 401(k) plans here.