New Government Initiatives to Boost Retirement Saving

September 6, 2009 by  
Filed under Retirement Planning

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.

This is what the President said about the first retirement planning initiative:

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.


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19 Responses to “New Government Initiatives to Boost Retirement Saving”
  1. Terry Pratt says:

    The workers who need retirement saving the most – those working at the bottom of the economy – are unlikely to get much help from these initiatives.

  2. Roger says:

    Not bad plans; hopefully, they’ll help the number of middle-class people who seem to falling further behind when it comes to funding their own retirement.

  3. These changes seem fairly underwhelming. Even when I was employed by a small biz, I can’t see these changes being much help.

    By not being big enough to have a 401K, I ended up with a SEPP that netted me thousands more per year.

    Directing refunds to retirement sounds good, but really the goal is NOT to have a refund, or at least a very small one.

    The one exception is the conversion of unused sick time and vacation days. Although, I always burned through vacation days, and while I rarely used sick days, no employer ever compensated for unused days.

    Overall, I give it a ‘meh’

  4. jeff says:

    I was interested to hear your take on the new savings options for 401(k)’s as you typically prefer a hands-off approach from the government. I think that making it easier and more automatic for people to save will benefit in the long run. Lets see how well it works.

  5. MasterPo says:

    TML – I’m sorrry but if an empoloyee is to lazy to fill out a form and hand it in to HR they are too dumb to even care about retirement! Just another example of rewarding laziness IMO.

    Terry – If someone spends their entire 30-40 year working life “at the bottom of the economy” the best help they can get is from the person in the mirror.

  6. My Journey says:

    If I deposit my refund into my IRA, doesn’t that increase the amount I should get back, automatically? Would I still have to fill out a 1040X?

  7. Terry Pratt says:

    MasterPo:

    Do you have any suggestions of recommendations? Going back to school (to acquire a marketable skill) is financially out of reach, and I have no realistic hopes of getting a better job at my age and with my dead-end job history.

    I guess it could be worse – one of my minimum-wage co-workers is over 60. (There’s no age discrimination at my workplace, all age cohorts 18-65 are represented, and all earn within 20 cents of minimum wage.)

  8. Terry Pratt says:

    If you deposit your refund into an IRA, that increases the amound you should get back NEXT YEAR.

    e.g. If you got a refund (in 2009) on your 2008 taxes, and deposit it into an IRA (in 2009), you should get a larger refund on your 2009 taxes…in 2010.

  9. Jason Unger says:

    I’m split on the automatic enrollment. Obviously, people are better off if they’re saving for retirement, but on the other hand, it should be their responsibility to make it happen.

    Then again, if someone gets to retirement and has no money, they’ll be living off of the system … our tax dollars.

  10. Terry Pratt says:

    When people point out the above, I always ask them:

    How much did you expect me to save with student loan debt and a minimum wage income? Did you expect me to buy a house and live off the equity (e.g. reverse mortgage) in old age?

  11. My Journey says:

    Terry,

    1) I am almost positive your answer to my question is wrong. If you do your taxes early enough and your contribution is made prior to April 15 of that year it can count for the previous year.

    2) “How much did you expect me to save with student loan debt and a minimum wage income?”

    Why do you have student loan debt and a minimum wage income? Did you get a B.A. in art history and then work at McDonalds? Because even Starbucks pays more than minimum wage. So do most gov’t jobs – You may be too old to become a police officer or fire fighter, but what about municipal water or clean up job?

    Even if your 55 and you have dead end job history, you can get into sales, or a better lower end job as pointed out above.

  12. MasterPo says:

    Terry – If you have a student loan where did you go to school? What did you study?

    (I’ll answer your prior question after you respond, although MJ may have gotten to my point already.)

  13. Terry Pratt says:

    MyJourney said:

    Terry,

    1) I am almost positive your answer to my question is wrong. If you do your taxes early enough and your contribution is made prior to April 15 of that year it can count for the previous year.

    2) “How much did you expect me to save with student loan debt and a minimum wage income?”

    Why do you have student loan debt and a minimum wage income? Did you get a B.A. in art history and then work at McDonalds? Because even Starbucks pays more than minimum wage. So do most gov’t jobs – You may be too old to become a police officer or fire fighter, but what about municipal water or clean up job?

    Even if your 55 and you have dead end job history, you can get into sales, or a better lower end job as pointed out above.
    ——————————————————————–

    1) You’re right! I’ve never had an IRA, so I have no actual experience with the tax issues, but I had neglected the possibility that someone could make an IRA contribution AFTER the tax year and BEFORE filing a tax return, i.e. January 1 – April 15. Indeed, this is probably a very common occurrence, I had simply missed it. (I believe the proper response is…D’OH!)

    2) I graduated with a liberal arts degree – I had obtained my degree with law school in mind…at the bottom of the last steep recession (early 1980s)…in the Rust Belt, which was an astonishingly lousy place to look for a job at the time. (Estimates at the time suggested that two-thirds of new graduates were leaving the state to seek jobs elsewhere.) I didn’t have any money to relocate – by graduating, my income declined as I lost my on-campus janitor job which paid greater than minimum wage – so I stayed in the area and took the minimum wage jobs. I deferred student loan payments as long as possible, then made payments until the fourth of five rent incre4ases in five years (the downside of Reaganomics you don’t hear about) squeezed me to the point of defaulting on my student loans. I’ve had a student loan garnishment for years but the principal is declining slowly (when I defaulted, a bunch of deferred interest plus junk fees were bundled into principal, ballooning my balance). Now at my age, I think it’s extremely unlikely I’m going to get a ‘better’ low-end job, considering all the unemployed applicants half my age seeking similar jobs.

  14. Terry Pratt says:

    MasterPo:

    I have a political science degree from a large midwestern university. Fairly useless as degrees go, unless you go to grad/law school. My plan was to go to law school, but by the time I graduated, law school had becomed prohibitively expensive and I had friends coming out of law schools and working menial jobs (because they didn’t get hired in the recession) to make their student loan payments.

    Basically, I had a fit of risk aversion which I have regretted since.

  15. Terry:

    Don’t ever regret not going to law school. It’s a wasteland of unemployed and underemployed lawyers out here right now. The worst ever.

  16. My Journey says:

    TML,

    I rarely disagree with you, but I have to now. Do you think Terry would be in a worse situation than he is now, if he had gone?

    My problem with Terry’s story, is the self loathing that it is riddled with. Stop! Lets make a plan. Have you applied to sales jobs? Have you applied to Starbucks, Walmart, Union jobs, town jobs? Have you tried waitering, bartending? Do you have 2 jobs right now? If not, why? Is your time too valuable?

    I feel like this is a fact pattern and I don’t have all the information.

    “I didn’t have any money to relocate – by graduating, my income declined as I lost my on-campus janitor job which paid greater than minimum wage – so I stayed in the area and took the minimum wage jobs.”

    Lets assume that your on campus pre-graudation janitor job was better than the job options out there…why didn’t you attempt to get a similar janitorial job? Maybe at a different college, a local HS, an office building?

    “I have a political science degree from a large midwestern university. Fairly useless as degrees go, unless you go to grad/law school. My plan was to go to law school, but by the time I graduated, law school had becomed prohibitively expensive and I had friends coming out of law schools and working menial jobs (because they didn’t get hired in the recession) to make their student loan payments.”

    Why didn’t you become a history or social studies teacher? Did you ever try to bother and become one?

  17. MasterPo says:

    I agree with MJ.

    Even if Terry didn’t go to law school for whatever reason there is absolutely no excuse for him to have been “stuck” in a min wage job for the last 25 years.

    Terry – What in Heaven’s name have you been thinking for the last 25 years?!?!?

    OK, law school didn’t pan out. Maybe you chose to wait a few years to see if things bounced back and you could continue with your plan. Well, things didn’t.

    Didn’t even once in the last 25 years you wake up and say to yourself “Well this isn’t going as I had hoped. I better get a new life plan FAST!”???

    You say it was in the early 80’s and now you’re in your 50’s so that would have made you around 30 at the time you got your undergrad degree. Certainly a very marketable time in your life.

    Another question: If the rust belt was a no-go for your plans, did you consider moving else where? If not, why not? And if you did consider it, why didn’t you do it?

    Sounds to me that you couldn’t (or wouldn’t) see the need to change your plan when the realities of life confronted you. Instead, you moaped around for 25 years at min wage and now blame the world. So what would you have done in court if the other party suddenly pulled a piece of evidence or legal manuever you hadn’t planned for? Just keep going like it never happened??

  18. Terry Pratt says:

    I never really wanted to go into teaching, and especially didn’t want or afford to go back to school to pick up a teaching certificate.

    Yes, I had considered relocating but had no money, so I didn’t know quite how that was going to work. Ultimately, an extended illness with loss of income did force relocation, but family paid to fly me out and feed me until I was able to work again. So now I’m relocated…in a place that is economically just as bad as the place I left.

    Before relocating, I was so depressed I had panic attacks, which limited geographically the jobs I sought. No more panic attacks, but no more car either.

  19. My Journey says:

    Wow Terry, you are a self loathing disaster dude. Never wanted to go into teaching, Law school didn’t work out for you? wahhh grow up man. At the time you graduated you probably didn’t even have to get a teaching certificate (vs now). Read the comments above, 3 or 4 people have given you options and all you have are excuses.

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