A federal law is needed to make auto enrollment an integral “part of the system” to encourage greater participation and savings in 401(k) plans, said Robert Reynolds, president and CEO of Putnam Investments.
In an interview, Mr. Reynolds advocated changing the Pension Protection Act of 2006 to achieve this goal. “Now, a sponsor has an option to use it or not use it,” he said. “It should be part of the [401(k)] system, and make it optional for the participant to opt out.”
For plans now offering auto enrollment, the Pension Protection Act provides a safe-harbor exemption from required annual testing to make sure plans don't discriminate in favor of higher-paid employees. These plans must defer at least 3% of employees' pay in the first year and automatically increase these contributions by one percentage point annually to a minimum of 6% and a maximum of 10%. Auto-enrollment investments must be made in qualified default investment alternatives. Plans also must match all of the first 1% of employees' contributions, plus half of additional employee contributions up to 6% of wages.
Mr. Reynolds said his proposal would feature a 6% initial deferral rate rather than the current law's safe-harbor provision of 3%. Mr. Reynolds recommended that the automatic annual escalation under his proposal should be one percentage point a year to a maximum of 10% of salary.