Saving for Retirement Could Soon Become Even More Painless

NEW YORK (TheStreet) -- Saving for retirement could soon become easier for millions of Americans.

Federal and state governments are working on new rules that would automatically deduct more of each employee's paycheck for their 401(k) plan and automatically increase that amount over time.

The aim is to help the 58% of Americans who don’t contribute to a 401(k) plan, as well as the 60% who don't have enough money in their savings accounts to live on for six months or more, according to Fifth Third Bank.

The SAFE Retirement Act introduced by Sen. Orrin Hatch (R-Utah), as well as the Retirement Security Act sponsored by Sens. Susan Collins (R-Maine) and Bill Nelson (D-Fla.) include measures to encourage and expand auto-enrollment and auto-increase. Currently, any employer can offer automatic enrollment, but not all do and and not all employees who are eligible participate.

"Their impact today is somewhat limited because of thresholds established by current law," said Cathy Weatherford, president and CEO of Insured Retirement Institute (IRI). "These bills seek to address that issue by effectively increasing these limits.” 

Current law permits auto-enrollment beginning at a 3% of annual salary and caps automatic increases at 10% of pay. The bill introduced by Nelson and Collins would start automatic deferrals at 6% of salary, while Hatch’s bill would do the same, as well as eliminate the 10% cap on automatic increases.

"Presently the majority of private-sector employers using automatic enrollment set the default rate at 3% of pay, the starting point for the current auto-enrollment safe harbor," said Weatherford. "This is too low for adequate retirement savings."

Hatch, the chairman of the Senate Finance Committee, first introduced SAFE in 2013, and has said he intends to reintroduce it this year.

"The IRI submitted a letter of support when it was first introduced and we look forward to working with Chairman Hatch to help advance the legislation particularly those provisions where there is broad bipartisan support," said Weatherford.

If this proposed legislation, combined with bills such as the Lifetime Income Disclosure Act, advances on Capitol Hill, it may open the door to more retirement income for today’s workers.

“Many states are actively working to create a low-cost, low hassle way to help employees save more for retirement, whether that’s by mandating auto-IRA’s or exploring other options that will compel owners and employees to save for retirement,” said Stuart Robertson, president of ShareBuilder 401k.

The Lifetime Income Disclosure Act would require retirement plans to provide estimates of how much monthly income a worker’s savings will generate in retirement.

Some 90% of workers say they believe lifetime retirement income estimates on benefit statements would be helpful in preparing for retirement, and more than 75% said they would increase their plan contributions by 4% or more after seeing lifetime income estimates, according to an IRI study.

"We believe these lifetime income estimates will facilitate better financial decision making and encourage better savings habits," Weatherford said.

The Department of Labor is already working on rules for including lifetime income estimates on benefit statements.

"The DOL can advance this rule without the Lifetime Income Disclosure Act being passed," said Weatherford. "The Act would, however, require lifetime income estimates on benefit statements and thus require the DOL to move forward with a rule."

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned. 

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