All companies that offer 401(k) plans should be required to automatically enroll employees in the plans, the head of Putnam Investments told Investment Company Institute members today.
Adopting a compulsory auto-enrollment system will free the financial industry from spending substantial resources trying to convince people to sign up for the plans, said Bob Reynolds, president and chief executive of the Boston-based firm.
“Let’s make opt-out mandatory for all 401(k)s,” he said.
Mr. Reynolds made his comments as part of a panel at the ICI’s annual general membership meeting in Washington.
The Pension Protection Act of 2006 allowed companies to enroll workers automatically in 401(k) plans unless employees specifically elect not to join the defined contribution retirement savings plans.
As more companies have adopted auto-enrollment, participation in the plans has increased significantly. About one-third of companies that offer the plans now automatically enroll their employees, and participation rates have climbed to more than 90%, from about 66% of eligible workers, Mr. Reynolds noted.
Just 6% to 7% of workers are likely to elect to opt out, he said.
The plans have “become the retirement plan for this country,” Mr. Reynolds said.
“Let’s make it do what it’s supposed to do and that’s cover as many Americans as possible and provide the type of income people need in retirement,” Mr. Reynolds said.
Auto-enrollment “puts inertia on the investor’s side,” Ed Bernard, vice chairman of
T. Rowe Price Group Inc. of Baltimore, said during the same panel discussion.
An unexpected benefit of auto enrollment is that the industry would be able to “devote to financial literacy and help [workers] be more effective in saving for their retirement,” he said.
The government also should provide guarantees to annuities, Mr. Reynolds suggested. “There needs to be [the Federal Deposit Insurance Corp.] behind these guaranteed products and not just the balance sheet of one insurance company,” he said.
Such a system could be funded by fees imposed on the industry in the same way that banks pay fees for deposit insurance to the Washington-based FDIC, Mr. Bernard said.
