Coming soon: automatic enrollment in company retirement plans

Few people may read it or totally understand it, but a 30-page government rule brimming with gobbledygook and legalese is sure to revolutionize the way Americans save and invest for retirement.

Thanks to the rule, millions of workers who don't specifically "opt out" will see a portion of their salaries automatically directed to diversified portfolios of stocks and bonds in their employer-sponsored tax-deferred 401(k) retirement plans.

This final rule by the US Department of Labor, effective Dec. 24, lists requirements for "default investment alternatives under participant directed individual account plans."

In plain English: Employers can not only automatically enroll workers in 401(k) plans but also direct their contributions to "default" investments deemed "appropriate" for long-term retirement savings if the workers don't specify a choice.

In a major shift, these default options will now consist only of investments designed to provide "degrees of long-term appreciation and capital preservation through a mix of equity and fixed-income exposures."

That basically means diversified portfolios of stocks and bonds that historically have provided higher returns than "safe" investments while minimizing - but not totally avoiding - the risk of large losses.

Money market and stable-value funds, which preserve principal but offer scant growth potential, will no longer qualify as default options in 401(k) plans, except for the first 120 days of an employee's participation, or as part of a diversified portfolio.

"These new default options will really help people in the long run," said Ann Combs, a former assistant secretary of labor who was instrumental in the initial drafting of the rule last year and now works for Vanguard, a leading provider of employer-sponsored retirement plan services.

The Department of Labor, after reviewing more than 120 comments on the initial proposed rule, adopted it with only minor modifications last month.

Employees can always opt out by declining to enroll in 401(k) plans or, if they enroll, by choosing from among investment options on their own. But the rule's backers are counting on inertia to help increase retirement savings in 401(k) plans by as much as $134 billion by 2034.

"Inertia is such a powerful force," Combs said. "Many people don't know what to do. Now they will be defaulted into an investment option that allows them to accumulate significant amounts for retirement."

The new rule is expected to give a major boost to automatic enrollment plans facilitated by the 2006 Pension Protection Act. Basically, plan sponsors that direct workers' contributions to permitted investments won't have to worry about being sued over investment losses, although they are still responsible for the "prudent selection and monitoring" of default options.

That's no easy task, considering the growing number of so-called lifecycle, lifestyle, target-date retirement, and balanced funds, and professionally managed accounts. Even investments that appear similar, such as mutual funds from fund firms Fidelity, Vanguard, and T. Rowe Price for investors retiring in a particular year, vary in their asset allocations.

Still, employers have been increasingly adopting diversified default options even before the new rule becomes effective. According to human resources consultant Hewitt Associates, about one-third of companies automatically enrolled employees in 401(k) plans in 2007, up from 19 percent in 2005. Of those, more than 77 percent defaulted employees into a diversified portfolio, up from 39 percent in 2005.

"It is obvious today's employers understand the majority of their employees take a back seat in managing their retirement," said Pamela Hess, a Hewitt official.

Of course, "it wouldn't be a bad thing if employees looked at their 401(k) statements and became involved" in planning for their retirement, Combs said.

That actually would be terrific, but perhaps that's too much to expect.

Humberto Cruz is a columnist for the South Florida Sun-Sentinel. He can be reached at AskHumberto@aol.com.