Download Locations:
Summary:
Most employers that sponsor retirement savings plans under ?401(k) of the Internal Revenue Code (IRC) require employees to decide whether to enroll in the plan. The Internal Revenue Service (IRS) has issued rulings to inform employers that it is permissible under current law to enroll employees in these plans automatically, provided that the employee is notified in advance and is permitted to leave the plan if he or she chooses to do so. Automatic enrollment, in which a percentage of the employee's salary is placed in an individual account without requiring the worker to take any action, has been shown to increase worker participation in ?401(k) plans and similar salary reduction retirement savings plans. In 2004, automatic enrollment had been adopted by an estimated 11% of ?401(k) plans. About 1% of plans with fewer than 50 participants and 31% of plans with 5,000 or more participants had automatic enrollment in 2004. H.R.4, the Pension Protection Act, includes provisions to promote automatic enrollment. Types of Retirement Plans. About half of all workers in the United States participate in an employer-sponsored retirement plan, a figure that has remained relatively stable for the past quarter-century. Over the past 20 years, however, there has been a shift in coverage from traditional pensions, also called defined benefit plans, to defined contribution plans such as those authorized under ?401(k) of the Internal Revenue Code (IRC). According to the Bureau of Labor Statistics, only 21% of workers in the private sector participated in a defined benefit plan in 2005, whereas 42% participated in a defined contribution plan. About 11% of private-sector workers were in both types of plan at their current job in 2005. Defined benefit (DB) plans typically are funded entirely by the employer, and they are required by law to offer the retiree the option to receive his or her benefit in the form of a guaranteed life-long annuity.1 Defined contribution (DC) plans consist of individual accounts in which workers can accumulate savings for retirement. Prior to enactment of the Revenue Act of 1978 (P.L. 95-600), DC plans also were typically funded exclusively by employer contributions. This law added ?401(k) to the IRC, allowing employees to make pre-tax contributions to employer-sponsored retirement savings plans.
