Smart Retirement Savings

An Ownership Society Still Takes Time

WSJ reviews the progress to get more people automatically signed up for defined contribution plans like 401(k). I generally favor the adoption of The Pension Protection Act of 2006, which will increase the awareness of retirement savings in the general public, and force more people to save for the rainy days. And, if there are more money flowing into the stock market, current players in the market should benefit too.

Milton Ezrati, chief economist at Lord Abbett Funds in Jersey City, N.J., doesn't want to rain on the fund industry's parade. Nevertheless, he has some cloudy words: The pension-reform law passed earlier this year may not result in an immediate tidal wave of assets into 401(k) plans.

The Pension Protection Act of 2006, passed in August, is designed to encourage wider participation in defined-contribution plans such as 401(k) retirement-savings programs by encouraging employers to automatically enroll new employees unless they opt out. The mutual-fund industry hopes this provision will lead to lots of new money for it to manage. Previously, the onus was on employees to sign up for their companies' retirement plans.

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While some studies have suggested there would be a "tremendous percentage increase in the number of people involved," Mr. Ezrati said, "the dollar flow would be considerably less" than might be expected.

"Our experience with 401(k) plans is that those who don't participate are either short-time or very new employees, and they tend to be at the low end of the pay scale," he said. "There are also people who just allow the minimum; they don't put any extra into the plan."

An official at Vanguard Group had a similar view. Those who are auto-enrolled will be starting from scratch, so there will initially be a lot of small 401(k) accounts that won't generate enough income to support themselves, said Stephen Utkus, director of the retirement-research center at Vanguard Group, the Malvern, Pa., fund company.

Nevertheless, Vanguard thinks auto-enrollment is a good idea. "It's just not the boon people think it is," Mr. Utkus said. "But it's a good idea from a retirement-policy point of view to get more people in these plans."