Wed 16 Aug 2006
The New Pension Bill - Who really benefits?
Posted by RichSlick under Financial Safety
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While I’ve glanced at some of the benefits the new pension bill to be signed by the President, I was somewhat skeptical about who the true beneficiaries would be once it’s passed. Let’s face it, legislators mainly pass bills that either benefit mega corporations or the legislators themselves so I have to wonder what the hidden agenda is with this bill.
The main issue I had with the bill is the “automatic enrollment” provision of the bill. It essentially states that employers can now automatically enroll (i.e. involuntarily add) employees to their company’s 401k plans. So who is truly benefiting from this?
If the new bill will automatically enrolls 30 million people who aren’t enrolled now and these employees have an average salary of ~ $30,000/year and the average contribution will be set at 4% then there will be a new influx of
30,000,000 x $30,000 x .04 = $36,000,000,000. Yes that’s correct, 36 BILLION flowing into 401k plans. Most of this money will be handled by the mutual fund industry and they’ll take their usual 1% or 2% cut in “fees” to say the least so they’ll make out like bandits earning at the very least $360 million in new fees.
Of course, I haven’t even factored in any company matching funds which could double these numbers. So with a stroke of the pen, Bush and Congress will create hundreds of millions for the mutual fund industry which will partly be funneled back into the politicians at some point.
With 40 million uninsured workers out there right now, I am completely skeptical that this is going to go off without a hitch. I would imagine people would rather have health insurance for themselves and family vs. 4% of their pay going into some type of retirement account. I recently recall reading that a large percentage of people cash out their 401k when they leave their employer anyway so I continue to be skeptical.
I’m wondering if companies are shielded from lawsuits when poor Joe Blow’s checks bounce because he had that extra 4% of his salary taken out and didn’t factor it in….
August 17th, 2006 at 8:21 am
I read that, while there can be an automatic enrollment if the employer chooses this, that employees may easily opt out.
The theory is that most people are too apathetic about their finances to make a decision, and that they’ll just be just as lazy to opt out as they are to opt in. So maybe some people who aren’t planning for their financial futures will benefit.
Where I work, we have lots of office employees making decent salaries who should be able to afford a 401k contribution. Most won’t even put in the 3% to get the employer matching contribution. It’s really like leaving money on the table.
August 17th, 2006 at 1:31 pm
I think the issue will come in when employers start benefiting from having their employees participate. I know our 401k provider has “discounts” for higher volume of money coming in.
I’m not entirely sure how things will all pan out but I can forsee mutual fund companies offering “rebates” a.k.a. kick-backs to employers for increasing their volume.
Remember the 401k/mutual fund industry charges fees (usually 1% or 2%) to most of their clients. Great volume = great profits.
I’m skeptical that it will really help apathetic employees. I think many will simply cash out when they move on to a new job.
August 17th, 2006 at 6:02 pm
Good point on the cashing out. You’re probably right.. people who are apathetic about their 401k will just take that as a windfall and blow the cash.
Also a good point about the expense ratios. My 401k sure sucks in this regard, which is why I put in just enough to get my max matching contribution, and then I funnel the rest off to IRAs at Vanguard. 2% expense ratios are practically robbery.