Half of Americans don't have a retirement plan through their employer, and of those who do, few are saving enough to finance a retirement that will last several decades. To encourage more workers to plan for the future, President Obama announced in September several new federal initiatives to promote saving for retirement. Although employers had the option before, these changes make it easier for them to automatically enroll workers in retirement plans. Some employees will be able to convert unused vacation and sick days to funds for their 401(k)'s, and there's a new way to save tax refunds. Here's a look at how the new savings options could give your nest egg a boost.
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Automatic enrollment in retirement accounts. When left to their own devices, many employees don't sign up for their company's 401(k) plan. To get more workers to save for retirement, many large companies now automatically enroll their workers in 401(k) plans, unless the worker takes the initiative to opt out. A new rule makes it easier for small businesses to automatically sign up their employees for a 401(k) and increase the amount they save each year as well. "When [employers] put automatic enrollment in a new plan, you typically have to get approval from the IRS," says Lenny Sanicola of WorldatWork, a human-resources association.
The IRS recently streamlined the automatic enrollment process to make it simpler for small businesses to implement. Companies without 401(k) plans may automatically enroll workers in a SIMPLE-IRA. However, they must give employees at least 30 days' notice specifying what percentage of their salary will be withheld from each paycheck and how that money will be invested. At least once a year, those who aren't happy with the automatic enrollment stipulations may opt out of the plan, save a different amount, or choose different investments.
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Investing unused sick and vacation days. About one third of employed U.S. adults do not take all of the vacation days they are allotted each year, according to a 2009 Expedia and Harris interactive survey. Workers who are compensated for unused sick and vacation time may now be able to transfer that money to their 401(k). "This could be an effective way of increasing retirement savings when people need to do just that," says Steven Kronheim, vice president and associate general counsel for TIAA-CREF. "Those payouts when people do decide to retire can be very significant." But uptake has been slow. Representatives from Fidelity, T. Rowe Price, and Vanguard—the three biggest 401(k) administrators—say that few, if any, of their clients have begun shuttling unused leave time into 401(k)'s. "The paid-time-off deferral might be a nice feature to add to a plan and offer to employees, but in this type of limited budget environment, it's probably a little farther down the priority list," says David Phillips, a 401(k) consultant in Towers Watson's Minneapolis office. Perhaps workers don't want to convert their time off into retirement savings because they get so little of it. Employees in the United States typically receive just 15 vacation days a year, compared with an average of 40 or more paid days off in Finland, Brazil, and France, according to a Mercer analysis. Many companies also offer cash for unused days off only when employment is terminated—a time when that windfall may be needed.
Bonding with your tax refund. Workers can already have all or a portion of their tax refund directly deposited into an IRA. Beginning this year, taxpayers can also use their refunds to purchase Series I Savings Bonds by checking a box on their tax return. A pilot study found that the savings bond offering at tax time got many people who were saving nothing for the future to save something: The majority of the savings bond buyers (65 percent) had $5,000 or less in total financial assets. Series I Savings Bonds pay a monthly fixed rate of return plus an inflation rate semiannually based on changes in the consumer price index. The interest is exempt from state and local income tax, but it's subject to federal income tax, which can be deferred until the bond is redeemed. "They're kind of the very definition of safe," says Timothy Flacke, executive director of the Doorways to Dreams Fund. "They can be replaced if they are lost or stolen, they can't lose value, and they are inflation protected." Savings bonds, which accrue interest for up to 30 years, generally cannot be redeemed during the first 12 months after purchase, and three months' interest is forfeited if they are redeemed during the first five years. The ability to add co-owners such as children to the bond will become available next year.