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:
•Companies that offer traditional "defined benefit" plans, in which a promised benefit is typically paid to former workers as an annuity, face tighter rules to ensure the plans are fully funded. Employers will have to set aside 100 percent of amount needed to meet their obligations, and will have seven years to reach that standard.
•There will be special breaks for the hard-hit airline industry, intended to make it easier for some airlines to avoid terminating their existing pension plans. In the past few years, airline bankruptcies have helped create big deficits at the federal insurance program for corporate pensions, the Pension Benefit Guaranty Corp (PBGC). Although the PBGC is funded by corporate premiums, the collapse of some big pension plans has raised fears that a taxpayer bailout could be needed down the road.
•Companies get an "all-clear" signal about whether they can convert a traditional pension to a hybrid "cash-balance" plan, in which employers contribute a set percentage of salary to a worker's account each year. Workers can roll over that money into an IRA when they leave the job, or they can convert it at retirement to a lifetime annuity or a lump-sum payout.
•Companies are encouraged to enroll workers in 401(k) plans automatically. The new law allays concerns that this step conflicts with state laws forbidding garnishment of wages.
•It will be easier for companies to make their 401(k) plan's default investment one that includes stocks. A current pitfall: The default option is often a money-market fund, and participants stick with that instead of options that tend to offer better long-run returns.
•A controversial provision allows the companies that provide investments to 401(k) plans to also offer investment advice to the participants, as long as that advice is based on a computer model. Critics say that provides too little defense against self-serving advice from those companies.
Retirement experts generally see the new rules for traditional pensions as a trade-off. The risk of a taxpayer bailout will probably decline, but many worry that the measure may accelerate the pattern of companies freezing their pension plans, so that new workers don't get that benefit.
"We should everything we reasonably can to preserve and encourage" traditional pensions with defined benefits, says Mark Iwry, a former chief federal pension regulator now at the Retirement Security Project, a research and advocacy group in Washington supported by The Pew Charitable Trusts.
The law could make that goal harder to reach.
Its measures to promote participation in 401(k) plans, however, are less controversial.
"The automatic 401(k) provisions are a major step forward," Mr. Iwry says.
"We're already seeing a dramatic increase in automatic enrollment," he says, and the new law will give that trend a further boost.
Among large employers, about 39 percent now offer some balanced investment option, including stocks, as the default choice in 401(k) plans, according to surveys by Hewitt Associates, a consulting firm based in Lincolnshire, Ill. That's up from 28 percent in 1999, says Barbara Hogg, a senior retirement specialist at Hewitt.