Pension reform aims to boost savings

Americans are about to get a much-needed dose of retirement-saving discipline.

Under legislation that will soon be signed by President Bush, key features of the nation's pension system will shift from discretion toward autopilot for both companies and workers.

The goal is to restore the financial health of traditional corporate pensions and of households. The problem isn't merely that Americans aren't saving enough for retirement. During the past year, government reports comparing national income and spending found that households have a negative savings rate.

Millions of workers, to be sure, are contributing regularly to individual retirement accounts (IRAs) or employer-sponsored 401(k) savings plans. But millions of others aren't participating. And many in both camps have been borrowing or dipping into savings to pay for current living costs such as a rising tab at the gas pump. Consumer credit-card debt surged in June to $2.2 trillion, the Federal Reserve reported Monday.

The new pension law will hardly close Ameri- ca's savings gap by itself. But in a nation where free choices aren't always financially wise ones, experts say it will prod more people to build retirement nest eggs.

"This should make [employers] more willing to put in the automatic enrollment provisions" for 401(k) plans, says Alicia Munnell, director of the Center for Retirement Research at Boston College. "We need to make these plans as easy and automatic as possible."

At the same time, she and other retirement experts express concern that the Pension Protection Act of 2006 could accelerate the trend of companies freezing or abandoning traditional pensions that have helped provide a secure retirement for millions of workers at large corporations.

"As popular as 401(k) and other savings plans are, all the evidence is that they can't do the job," of ensuring retirement security, says Karen Ferguson, director of the Pension Rights Center, a consumer advocacy group in Washington. These do-it-yourself plans have "been used as a way of switching away from traditional pensions."

While 401(k) savings are tax-sheltered and portable among jobs, experts cite a host of shortcomings. Many employers don't offer such plans. Even with automatic enrollment, workers can opt out. Workers who do participate often don't save enough or withdraw money before retirement. And many employers don't match employee contributions.

About 58 percent of families have some type of pension plan, according to the most recent data from the Federal Reserve, which is for 2004. Of that group, 57 percent have a standard defined-benefit plan, while 63 percent have personal accounts, such as 401(k)s. Those two numbers total more than 100 percent because 20 percent of the families have both types of plan.

The pension bill, which was passed by the Senate last week, includes a host of significant changes to current law:

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