New Government Initiatives to Boost Retirement Saving
Sometimes – not often – our government’s attempts to get in the middle of our financial planning makes sense. This appears to be the case with several initiatives announced by the White House yesterday. These initiatives are intended to firmly move more Americans toward responsible levels of saving for retirement. Let’s review them briefly.
First, we’re going to make it easier for small businesses to do what large businesses do: allow workers to automatically enroll in a 401(k) or an individual retirement account. We know that automatic enrollment has made a big difference in participation rates by making it simpler for workers to save – and that’s why we’re going to expand it to more people.
The IRS has made further announcements about this, including pre-approved automatic enrollment language that employers can use to amend their retirement plans. According to the new rules, plan administrators can automatically increase the default amount that employees contribute to their 401(k) plan each year. The employer must provide at least 30 days notice to affected employees. The notice must specify the percentage of salary that will be withheld from the employee’s paycheck and state how that money will be invested.
As intrusive as it seems, I like this. Too many employees are heard whining about never being able to retire. Whether due to inertia, ignorance, benign neglect, or pure stubbornness, many of these same employees are simply not contributing enough to their own retirement. This gives those folks a real nudge in the right direction.
This is the White House statement of the second retirement planning initiative:
Second, we’ll make it easier for people to save their federal tax refunds, which 100 million families receive. Today, if you have a retirement account, you can have your refund deposited directly into your account. With this change, we’ll make it easier for those without retirement plans to save their refunds as well. You’ll be able to check a box on your tax return to receive your refund as a savings bond.
This is a fantastic idea. One of the most efficient ways to save for retirement is to keep your money out of harms way, meaning away from you. Let’s dump the notion that a tax refund is found money, destined to be wasted at the mall.
For the same reason, I also like the option of getting a tax refund in the form of bonds, specifically I-Bonds. The IRS has said that beginning in 2010, individual tax refunds can be used to purchase I-Bonds. All the taxpayer does is check a box on the return. Savings bonds will then be mailed to taxpayers in denominations of $50, $100, $200, $500, and $1,000. I-Bonds are not a good deal right now (paying 0% fixed interest) but that can change.
The third initiative announced to boost retirement savings was described this way:
Third, we’ll make it possible for employees to put payments for unused vacation and sick days into their retirement plan if they wish. Right now, most workers don’t have that option.
What this means that if your employer pays employees with cash for not going on vacation or getting sick, that cash can now be diverted directly into your retirement account. This is also a good idea. Pay for unused vacation or sick leave also falls into that dangerous “found money” category. Thus, making it a “never see it, never spend it” payment is a wise move.
These new retirement saving initiatives were well thought out. I hope they find success among the masses.