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WASHINGTON--The Labor Department is proposing new regulations to encourage more employers to offer automatic enrollment in their 401(k) and other participant-directed defined contribution plans.
The regulations, mandated by the pension funding reform legislation President Bush signed last month, is intended to protect employers offering automatic enrollment from fiduciary liability. Employers have been hesitant to offer such arrangements--under which employees who don't say one way or another whether they will participate in a 401(k) plan are automatically enrolled--out of concern they could be sued by employees if the investment choices they make on behalf of employees do badly.
Under the proposed regulations, to be published in Wednesday's Federal Register, employers would be shielded from liability if, among other things, contributions are invested in "qualified default investment alternatives." One alternative would be so-called life-cycle funds, in which the asset mix is periodically adjusted for employees' ages, while another would be balanced funds which are a mix of equities and bonds.
Additionally, notices would have to be provided to participants at least 30 days before funds are invested, describing the circumstances in which assets will be invested and giving participants the right to direct their choices out of default investments.
Currently, only 25% of large employers offer automatic enrollment, according to benefits consulting firm Hewitt Associates Inc. But more employers have been interested in adding such a feature as they freeze their defined benefit plans.
Employers want greater assurance that employees--through 401(k) and other defined contribution plans--will build up bigger account balances to at least partially make up for the loss of future benefit accruals from the defined benefit plan.
Currently, only about 70% of employees eligible for a 401(k) plan actually participate. "Too many workers, some overwhelmed by investment choices or paperwork, are leaving retirement money on the table by not signing up for their employers' defined contribution plan," said Labor Secretary Elaine Chao at a briefing.
Labor Department officials believe the 401(k) plan participation rate could be increased to 90% for those employers that adopt automatic enrollment.