Repairing Ravaged Retirement Accounts

07/28/2009 10:03 am EST


Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and

Knight Kiplinger, editor-in-chief of The Kiplinger Letter, says many companies are trying to help employees save more for retirement, and Congress may help—a little.

Ravaged retirement savings are a big worry, both for workers and for employers that want to help. It’ll take years to rebuild worker accounts pummeled by last year’s market losses.

Moreover, Americans were woefully undersaving for their old age before the financial meltdown began. Half of private sector workers between the ages of 25 and 64 have no retirement plan with their employer.

Uncle Sam won’t be of much assistance, with Social Security likely facing cuts in benefits. And with the budget deficit in the stratosphere, new tax incentives to increase savings aren’t likely.

Lawmakers will do some tinkering next year, making firms offer automatic payroll savings so workers will find it easier to pump up contributions to their IRAs. Under one idea, firms with ten employees or more and no retirement plan would have to comply.

Small firms that create new 401(k) or other programs could get an extra $25 a worker to defray setup costs. And disincentives for Simple IRAs [could be reduced]: raising contribution limits, cutting early withdrawal penalties and ending a ban on rollovers into other plans.

Congress will also offer aid to firms still shouldering pension programs. Defined benefit plans now cover only 17% of private sector workers, a percentage that will keep falling. Look for lawmakers to extend relief to more underfunded plans, making a greater number eligible for the easier funding schedule approved in 2008. Congress may go further, giving firms ten years to reach full funding instead of seven.

The fact is, most employers want to do better by their workers, helping more. But with the weak economy, they can’t afford to. Their options are limited.

About 40% of firms have halted or cut matching contributions or will by year-end. Don’t expect firms that cut 401(k) matches to restore them before 2011 or so. By then, competition for the best workers will force many to increase benefits offered.

When matches do resume, many employers will tie them to profitability, rather than commit to a fixed percentage of pay. They’ll want the increased flexibility.

Firms will make sure workers get more advice with investment decisions, leaning on plan providers to produce it in order to limit both expense and liability. And they’ll nudge workers to ratchet up their 401(k) contributions each year with features that put savings on autopilot, increasing the share of pay each year unless the worker opts out.

Of course, some employers will remain reluctant to adopt automatic enrollments, already allowed by law. One option for them: Delay enrollment till the second year on the job, avoiding costs for short-termers.

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