Improving the 401(k) System

401(k)s are a great retirement investment vehicle (for those in the USA). Since the introduction of 401(k)s they have proved very advantageous to those saving for their retirement. See our previous post on: Saving for Retirement.

However, the experience thusfar shows a weaknesses in the system. Many people don’t even take advantage of a 401(k) to save for their retirement. From a public policy perspective it creates a huge long term problem. The economy will end up with millions of people that didn’t save for retirement and will be a drain on those who did save for retirement and the rest of the economy.

So Congress actually passed a good revision to the law. Employers will now be required to default to having employees save for their retirement in 401(k) plans. The employee still has the option to decline doing so, but now, without such a choice, they will automatically save for retirement. Great news, if like me, you believe many who would have not saved for retirement now will, and that doing so will be a good move for them and for the overall economy.

News coverage of the new law:
Pension reform: Boon for 401(k)s

A majority of workers 45 and older have less than $50,000 in savings, according to a survey by the Employee Benefit Research Institute (EBRI). What’s more, almost 40 percent of workers over 40 don’t participate in a 401(k) when they are eligible.

The new legislation encourages companies to automatically enroll 401(k)-eligible employees and to automatically increase worker contributions every year. It also allows the plan provider chosen by the employer to offer investment advice to workers.

Something had to be don’t to improve participation. This seems like a good method. Lets see in a few years how things look.

President Bush Signs New Pension Bill
Pension changes: What you need to know
AARP Highlights Positive Effect of Pension Bill

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  1. Pingback: Curious Cat Management Improvement Blog » Gladwell (and Drucker) on Pensions

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