Just Shelley

Automatic Enrollment

Recovered from the Wayback Machine.

In order to work on the contract for a large company earlier this year, I had to take employment with another company. This isn’t that unusual, though I typically won’t accept such conditions–I am an independent, and if there’s concern about taxes being paid, a simple filing of a 1099 with the government will ensure I square up at year’s end.

Regardless, it’s not unusual to have to work for one company to contract for another. What was unusual was finding in one of my paychecks an unauthorized withdrawal for the company 401(k). That’s when I found out about a new concept called automatic enrollment.

It would see that people are not contributing enough to their company’s 401(k)s. Chances are most people don’t because they barely make enough to make ends meet. After all, costs of goods has increased while wages have remained relatively static. The thing is, though, for those who do contribute, especially the larger contributors, the fewer company employees participate, the less money they accrue to their account. In other words: those in upper management and making higher wages are impacted when those making less don’t set aside some of their money in order to bolster a weak 401(k) (raise ADP scores, I believe it is.)

As for the fund management companies, John Hancock in this instance, the fewer people contribute to them the less money they have to invest, and the less fees they can take.

Now, one would think that withdrawing from a person’s paycheck without their permission would be illegal. It’s true that 32 states have anti-garnishment laws that seemingly conflict with this practice, but the IRS is all for it. One reason given is that this makes 401(k)s less discriminatory.

Another is that it’s seen as a way to encourage people into contributing to their future retirement. There’s concern that people are ‘intimidated’ by 401(k) plans and this is why they don’t participate. Again, though, when people are barely making it month to month, retirement is a long ways off. Since it’s a company’s lower paid employees (who, interestingly enough, seem to make the bulk of said companies), who are not participating and making the plan less feasible for those who are, I would say that retirement is less a concern than paying $4.00 a gallon for gas.

A person can choose not to participate. However, most people, especially contractors such as myself, when sent packages regarding employee contributed retirement plans don’t necessarily look through it to find out that the company practices automatic enrollment–especially when you’ve never heard of it before. I just tossed the package when it came, as I knew I didn’t want to participate in the plan. Big mistake.

Once I found out about the automatic enrollment, I canceled it, but here’s the kicker on this approach: I couldn’t receive the money until the employment was terminated. Once the contract was finished, I now have to fill out a form, copies of which go to the IRS as well as the pension fund, just to get this money back. As it is, the pension plan charged a fee for ‘managing’ my contribution; and the IRS will charge a fee, now, because I’m taking ‘early’ withdrawal.

And if people were intimidated about 401(k) plans before automatic enrollment, what makes anyone think that they’ll be less intimidated now that they’re automatically enrolled? A 401(k) requires informed decisions to be truly effective. Without, incidents such as the recent Enron escapade happen, and everyone loses their money.

A better approach would be to provide education about 401(k) plans to employees–and this includes those aspects of the plan where the IRS is involved. Many people are concerned, and rightfully, about needing to get access to this money because of a future problem and worry about having to pay penalties to the IRS.

More importantly, it’s better, by far, for lower income people to use cash rather than credit card, and to eliminate credit card debt. If the person is automatically enrolled in a 401(k), told it’s good for them, confused about the practice, and then because they don’t have the extra cash, go out and spend more using credit cards with 18 to 28% interest — whatever they make in their investment is offset by their use of the cards. Cards many times issued by the same companies that provide such plans.

There is a great deal of inertia among young people to invest in 401(k)s, but again, young adults are paying off student loans, buying cars and houses, furniture, getting married, generally just establishing themselves in life. It’s not usual for young people to push the ‘future’ out to the future. I can agree that perhaps this is a mistake and should be discouraged.

As has been discussed, though, in numerous financial publications, automatic enrollment puts these people into the absolute safest investments; investments that don’t necessarily return enough to make the investment worthwhile. These deductions do, however, add to the overall health of the fund–upping the ‘ratings’ and some such thing (there’s a lot more to this than is apparent from all the noble talk.)

Now 401(k) plans are a good thing, especially when the company contributes matching funds (mine didn’t). Again, though, they require active participation of the employee to be truly effective. As it is, for all the talk about ‘helping out the little folk’, I don’t think it’s clear exactly who does benefit from increased 401(k) participation: the lower income wage earners? Or the higher income wage earners, with a lot of money to invest?

Why am I writing about this now? Because Congress just passed pension fund and 401(k) reform legislation providing for, among other things, automatic enrollment for all companies that offer 401(k) plans, regardless of individual state concerns. Though the reform is welcome, as well as permanent passage of some of the limits, the bill is controversial for a number of reasons, not the least is that this is seen as pushing companies away from more traditional pension plans, into 401(k)s; something Sam Ruby can attest to as IBM has frozen its pension fund in favor of automatic enrollment 401(k)s.

The real irony of Congress passing this bill is that, in the same week, it failed to raise the minimum wage. Again. This follows last year’s passing of the so-called ‘bankruptcy reformation’ (which immediately had to be altered because of Katrina related losses). This follows on Congressional support for major drug companies over some old person trying to save a few pennies on their prescriptions (not to mention the only health care reform passed in the last 8 years — the Medicare Drug Plan.) This follows the green light Congress has given to telecommunication companies to control the ‘pipes’, so to speak. This follows on increases in the costs of gas by up to 50%, at the same time oil companies have earned their highest profits (many of them helped along by ’subsidies’ Congress can’t seem to find time to eliminate.) This follows on…

Well, let’s just say there’s a long string of ‘follows on’. Whether you’re a member of the social goodworld awarecorporate and family values, or the kill or be killed parties, be aware of this new legislation and run, don’t walk, to your HR and ask what this means for you.

Update Wikipedia article on 401(k)s because most of it is beyond my kin.

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