A Time for Savings

By Stan Hinden | October 2009

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Stan Hinden

"Nothing is as powerful as an idea whose time has come," wrote Victor Hugo, the prolific French novelist and poet. That bit of wisdom came to mind the other day when President Obama, Treasury Secretary Timothy Geithner and the folks at the IRS unveiled a series of federal actions that will make it easier for Americans to save money for retirement.

The Obama administration is taking immediate steps to encourage smaller companies to automatically enroll their workers in 401(k) savings plans. At the same time, the administration is offering all Americans new opportunities to increase their personal savings.

These moves build on Obama's support for legislation in Congress to create "Automatic IRAs." The proposal would allow employees who do not have pension, 401(k) or similar plans at work to save for retirement through an IRA payroll deduction plan. The concept has broad support in Congress.

So, are these the ideas whose time has come? It would seem so. Clearly, the audience and the need are both there.

"As many as 78 million working Americans-about half of the workforce-don't have a retirement savings plan at work," Obama said. Worse yet, the recent turmoil in the financial markets has been costly to current and future retirees. "Over the past two years, the American people have lost about $2 trillion in retirement savings," the president noted.

"Our nation," he said, "needs to do more to help families save and give them better choices to reach a secure retirement."

The Obama administration's new initiatives will do the following:

Expand automatic enrollment in 401(k) and other retirement savings plans.

In the past, companies with 401(k) savings plans invited employees to join and left it up to them to join or not. However, things changed when the Pension Protection Act of 2006 became law. It allowed companies to automatically enroll workers in the firm's 401(k) plan, to designate their level of savings and even their investment choices. At all times, these employees could make their own choices or even refuse to participate at all.

But experience soon showed that most employees, once enrolled, stayed in. As a result, average participation rates in 401(k) plans rose from 70 percent to 90 percent. Automatic enrollment proved to be particularly effective in bringing in many low-income and minority workers, who might have felt uneasy or uncertain about joining a savings plan.

It is interesting to note that about half of the nation's larger companies have now adopted automatic enrollment policies. But relatively few medium size firms or small businesses have done so. So, the Obama administration is going to make it easier for these companies and businesses to adopt auto enrollment by cutting down on the paperwork and legal steps that have been required.

Next, the Treasury and IRS have given a green light to companies that want to help workers increase their level of savings, either by raising their payroll deductions each year or by steering a portion of their raises into their savings plan. Here again, employees are free to opt out if they wish.
Create easier ways to save tax refunds.

Did you know that more than 100 million families receive federal income tax refunds each year and that those refunds average more than $2,000 each? I didn't know that but the IRS does. And so, starting next year, taxpayers will be able to use their refunds to buy U.S. savings bonds in their own names just by checking a box on their tax returns. By 2011, taxpayers will also be able to add co-owners such as children or grandchildren.

Currently, taxpayers can deposit refunds electronically in bank accounts or in IRA accounts. But if a taxpayer doesn't have a bank or other account, the IRS will gladly mail the bond to the taxpayer's home.

Meanwhile, the IRS wants to help taxpayers tap into yet another source for retirement savings: the cash payments they often receive for unused vacation or unpaid overtime when they leave their jobs. The Treasury and IRS will tell employers that they can let employees put those payments into their 401(k) accounts. They will even let employers make their own contributions to workers' 401(k) accounts.

All of these savings initiatives sound user-friendly and seem likely to increase the amount of retirement money that workers build up over time.

But the Treasury and IRS also have decided to make sure that when workers leave their jobs with piles of retirement money, they understand how to keep those funds working for them in tax-favored accounts.

So, the Feds have issued what they call "a plain-English road map," which will help explain the choices and options-both good and bad-that are available to job-changers and retirees. There are more details available on the IRS web site: http://www.irs.gov/retirement

When you think about the new savings that will be generated by the Obama initiatives, and when you consider the blockbuster potential of a new Automatic IRA, it is easy to believe that some clouds really do have silver linings.

The author was compensated for writing this article by AARP Financial.

While AARP endorses the services provided by AARP Financial Inc., AARP does not offer financial products or services itself and cannot recommend that you or any specific individual should purchase any particular product or service. AARP Financial Inc. is an investment adviser and a subsidiary of AARP.