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US Firms Automatically Enrol Staff Into 401K Plans

Mike Godfrey, Tax-news.com, New York

21 August 2000

Last month, Treasury Secretary Laurence Summers and Labor Secretary Alexis Herman gave their long-awaited official blessing to the automatic enrollment of employees into a company's 401K plan (individual tax-exempt retirement accounts), and the IRS issued some technical guidance on the procedures that should be used.

Automatic enrollment is usually applied after the employee's first year, and simply means that the employee is enrolled into the 401K if he or she does not choose to opt out. IRS guidance okays the practice of enrolling longer-serving staff as well.

Although the Government has now made it clear that it approves the practice, many large corporations have been doing it anyway, and it has had a dramatic effect on the proportion of empoyees taking up the plans. According to the New York Times, 75% of employees at 7-Eleven Inc now have plans, against 50% three years ago, while at Primex Technologies, an aerospace company in St. Petersburg, Fla., the proportion having plans is up from 35% to 80% in just two years. Primex says that when the workers receive their quarterly 401(k) statements and see the 50 percent matching contribution from the company, they are more motivated to stay on. "It's like free money," said a company official.

With automatic enrollment, the initial percentage of pay to be set aside is left to the employer's discretion. 7-Eleven's plan sets aside 3 percent of gross pay, a typical rate, and the company matches employee contributions at 36 cents on the dollar. Many other companies match at 50%.

Employers also decide how the money will initially be invested. According to Mark Iwry, the benefits tax counsel for the Treasury Department, employers are encouraged to put savings of automatic enrollees into a balanced fund, rather than a more risky stock fund or a low-return money market fund. "The plans are typically very careful in the investments they select for employees," he said.

Whether enrollment is automatic or not, however, it doesn't seem that saving is bedrock human nature - statistics show that fewer than one-third of people who leave jobs with 401(k)'s roll over the money into individual retirement accounts; the remainder simply pocket -- and pay taxes on -- the cash payout from the plans.

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