Changes Ahead for Default 401(k) Plans

New Labor Department regulations — intended to complement the Pension Protection Act and expected mid-February — may lead some employers to move to equity-based funds when acting on behalf of employees who do not make investment selections.

Watson Wyatt Worldwide says that although automatic enrollment and default investment programs can help more Americans realize higher retirement savings, employers still need to consider the impact on contributions and administrative costs, and to assess whether any plan design changes are needed.

For example, many corporations like that automatic enrollment aids employees’ retirement savings, but when employees take loans from their 401(k)s, it drives down retirement savings and increases administration costs.

“It’s to employers’ benefit to look at all ways to help employees to prepare for retirement. Otherwise, we may soon see a generation of workers that cannot afford to retire,” said Mark Warshawsky, director of retirement research, in a release.

A recent Watson analysis of 95 employers with defined contribution plans suggests that 48% would have to adopt different investment funds if the proposed rules became final; 33% automatically enroll employees in defined contribution retirement programs; and 57% are considering adding the option in the future.

Pension Plans Healthier

However, Watson Wyatt says America’s pension plans are on a firmer financial footing than they were two years ago, due to a sound economy and enhanced corporate contributions.

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An analysis of Fortune 1000 companies that sponsored defined benefit pension plans in 2005 shows that the rise in interest rates and strong stock market returns in 2006 — along with new investment strategies and increased employer funding — will result in continued improvement in pension health.

A previous study found that these companies’ pension plan funding increased from 82% to 92% between 2002 and 2005.

The latest analysis suggests that more pension sponsors experienced low pension-related risk (60% of plan sponsors, an increase from about 56% in 2004 and 51% in 2003). Further, pension-plan liabilities posed high financial risk for 9% of the companies surveyed, down from 17% in 2003.

“With anticipated improvements in pension plan funding due in part to new rules and reductions in pension risk, concerns about the strength of our pension system should be greatly alleviated,” said Warshawsky.

Elaine Rigoli has nearly 15 years of experience managing content and community for various B2B and consumer websites. Elaine has written thousands of business and technology articles and has been quoted in The Wall Street Journal and eWeek, among other publications.

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