[Congressional Record Volume 151, Number 49 (Thursday, April 21, 2005)]
[Senate]
[Pages S4118-S4120]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BINGAMAN (for himself, Ms. Snowe, Mr. Lieberman, and Mr. 
        Obama):
  S. 875. A bill to amend the Internal Revenue Code of 1986 and the 
Employee Retirement Income Security Act of 1974 to increase 
participation in section 401(k) plans through automatic contribution 
trusts, and for other purposes; to the Committee on Finance.
  Mr. BINGAMAN. Mr. President, I rise today to introduce the Save More 
for Retirement Act of 2005 with my colleagues Senator Snowe, Senator 
Lieberman and Senator Obama. This legislation is designed to achieve 
two important savings goals. First, it will encourage workers who are 
not currently participating in their employer's retirement plan to do 
so. Second, it will encourage workers who are currently investing in 
40l(k) plans to save even more. At a time when national savings is at a 
near all-time low, Congress needs to look at ways to expand retirement 
savings, particularly savings garnered through an employer-provided 
retirement plan. This legislation is a commonsense approach that is 
based on research undertaken and compiled by a host of retirement 
policy experts from both academia and business. It is imperative that 
the Congress continues to look for new and innovative ways to help 
workers save for their retirement through the existing employer-
provided plan system. This legislation accomplishes that goal by 
creating incentives for employers to modify their existing plans to add 
features that have been proven to increase savings.
  The first step is to encourage employers to add a feature to its 
40l(k) or similar plans to enroll its employees in the plan upon being 
hired unless the employee notifies the employer that he or she does not 
want to participate in the plan. The decision to participate still 
rests entirely with the employees, as they can opt out before 
participation begins or at any time afterward. Although some employers 
do offer these types of plans now, most maintain a more traditional 
structure under which the employee must opt into participating. Studies 
have indicated that such a seemingly minor change in how employees are 
enrolled can dramatically increase participation rates. It has been 
reported that one large company experienced an increase in employee 
participation in their retirement plan of 50 percent once the features 
were changed to automatically enroll its employees. Clearly the first 
step towards increasing our national savings rate is to get more people 
saving.
  Obviously the second step is to get those who are saving to set aside 
even more for their retirement years. For this reason, the legislation 
would encourage plans to add a feature that increases employees' 
contributions annually until it reaches at least 10 percent of the 
employees' compensation. Again, studies have repeatedly demonstrated 
that people are more likely to agree to save more in the future than 
they currently do. It has also been demonstrated that people are more 
likely to agree to save more in the future if they make the decision 
today and do not wait until future years to make that decision. In our 
legislation, the employee can stop a future increase or change the 
contribution rate. The employer has the discretion to tie these 
automatic increases to either an annual increase or to increases in 
salary or compensation. This is closely modeled on the Save More 
Tomorrow, SMarT, plan advocated by Shlomo Benartzi from UCLA and 
Richard Thaler from the University of Chicago. These behavioral finance 
experts claim that although participants in this plan may start saving 
at a lower rate--3.5 percent--than the average, within 4 years 
increases averaged 13.6 percent--a greater than 10 percent increase. 
Compared to the control group saving rate of slightly more than 8 
percent of their compensation, the end result is quite extraordinary.
  To encourage employers to make these two changes to the plan, the 
legislation creates a new safe harbor that, if all the criteria are 
met, treats the plan as being nondiscriminatory. In order to qualify 
for the safe harbor, the employer must provide either a nonelective 
match of 3 percent of the employee's compensation or an elective match 
of 50 percent of the first 7 percent of the employee's compensation. 
These criteria can be met also if the employer contributes a comparable 
amount to another qualified plan for the same employees. The employer 
must also allow its contributions to vest in either 2 years, if the 
employer enrolls the employees in its pension plan before the 
employees' first paycheck, or in 1 year if the employer enrolls the 
employees within the first quarter of being hired. It is important to 
note that both of these vesting periods are shorter than current law 
allows and are comparable to what employers can do under the existing 
safe harbor.
  Finally, in an effort to help ensure employees are invested wisely, 
the legislation directs the Department of Labor to provide guidance for 
employers in selecting ``default'' investments so that employers have 
options besides money market accounts and investment contracts. A 
default investment is the investment that is made when

[[Page S4119]]

employees fail to indicate how they would like their retirement savings 
invested. Due to liability concerns, retirement plans tend to invest 
these funds in either investment contracts or money market accounts. 
The benefit of compounding interest that would occur with even modest 
returns in broad-based funds that have an equity component is lost. 
This guidance will not allow employers to make default investment 
decisions that are risky or put the employee's retirement at risk. It 
is important to note that the employee always retains the ability to 
invest the funds differently in other investment options offered by the 
plan if they do not like the default investment offered by the 
employer.
  I thank all of those who have done considerable research into the 
impact of human behavior on savings, which was quite instrumental to 
the drafting of this legislation. I look forward to continuing to work 
with them and others interested in this new approach to addressing our 
Nation's savings problems.
  I ask unanimous consent that the text of the bill be printed in the 
Record.

                                 S. 875

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Save More for Retirement Act 
     of 2005''.

     SEC. 2. INCREASING PARTICIPATION IN CASH OR DEFERRED PLANS 
                   THROUGH AUTOMATIC CONTRIBUTION ARRANGEMENTS.

       (a) In General.--Section 401(k) of the Internal Revenue 
     Code of 1986 (relating to cash or deferred arrangement) is 
     amended by adding at the end the following new paragraph:
       ``(13) Nondiscrimination requirements for automatic 
     contribution trusts.--
       ``(A) In general.--A cash or deferred arrangement shall be 
     treated as meeting the requirements of paragraph (3)(A)(ii) 
     if such arrangement constitutes an automatic contribution 
     trust.
       ``(B) Automatic contribution trust.--
       ``(i) In general.--For purposes of this paragraph, the term 
     `automatic contribution trust' means an arrangement--

       ``(I) except as provided in clauses (ii) and (iii), under 
     which each employee eligible to participate in the 
     arrangement is treated as having elected to have the employer 
     make elective contributions in an amount equal to the 
     applicable percentage of the employee's compensation, and
       ``(II) which meets the requirements of subparagraphs (C), 
     (D), (E), and (F).

       ``(ii) Exception for existing employees.--In the case of 
     any employee--

       ``(I) who was eligible to participate in the arrangement 
     (or a predecessor arrangement) immediately before the first 
     date on which the arrangement is an automatic contribution 
     trust, and
       ``(II) whose rate of contribution immediately before such 
     first date was less than the applicable percentage for the 
     employee,

     clause (i)(I) shall not apply to such employee until the date 
     which is 1 year after such first date (or such earlier date 
     as the employee may elect).
       ``(iii) Election out.--Each employee eligible to 
     participate in the arrangement may specifically elect not to 
     have contributions made under clause (i), and such clause 
     shall cease to apply to compensation paid on or after the 
     effective date of the election.
       ``(iv) Applicable percentage.--For purposes of this 
     subparagraph--

       ``(I) In general.--The term `applicable percentage' means, 
     with respect to any employee, the percentage (not less than 3 
     percent) determined under the arrangement.
       ``(II) Increase in percentage.--In the case of the second 
     plan year beginning after the first date on which the 
     election under clause (i)(I) is in effect with respect to the 
     employee and any succeeding plan year, the applicable 
     percentage shall be a percentage (not greater than 10 percent 
     or such higher percentage specified by the plan) equal to the 
     sum of the applicable percentage for the employee as of the 
     close of the preceding plan year plus 1 percentage point (or 
     such higher percentage specified by the plan). A plan may 
     elect to provide that, in lieu of any increase under the 
     preceding sentence, the increase in the applicable percentage 
     required under this subclause shall occur after each increase 
     in compensation an employee receives on or after the first 
     day of such second plan year and that the applicable 
     percentage after each such increase in compensation shall be 
     equal to the applicable percentage for the employee 
     immediately before such increase in compensation plus 1 
     percentage point (or such higher percentage specified by the 
     plan).

       ``(C) Matching or nonelective contributions.--
       ``(i) In general.--The requirements of this subparagraph 
     are met if, under the arrangement, the employer--

       ``(I) makes matching contributions on behalf of each 
     employee who is not a highly compensated employee in an 
     amount equal to 50 percent of the elective contributions of 
     the employee to the extent such elective contributions do not 
     exceed 7 percent of compensation; or
       ``(II) is required, without regard to whether the employee 
     makes an elective contribution or employee contribution, to 
     make a contribution to a defined contribution plan on behalf 
     of each employee who is not a highly compensated employee and 
     who is eligible to participate in the arrangement in an 
     amount equal to at least 3 percent of the employee's 
     compensation,

     The rules of clauses (ii) and (iii) of paragraph (12)(B) 
     shall apply for purposes of subclause (I). The rules of 
     paragraph (12)(E)(ii) shall apply for purposes of subclauses 
     (I) and (II).
       ``(ii) Other plans.--An arrangement shall be treated as 
     meeting the requirements under clause (i) if any other plan 
     maintained by the employer meets such requirements with 
     respect to employees eligible under the arrangement.
       ``(D) Notice requirements.--
       ``(i) In general.--The requirements of this subparagraph 
     are met if the requirements of clauses (ii) and (iii) are 
     met.
       ``(ii) Reasonable period to make election.--The 
     requirements of this clause are met if each employee to whom 
     subparagraph (B)(i) applies--

       ``(I) receives a notice explaining the employee's right 
     under the arrangement to elect not to have elective 
     contributions made on the employee's behalf, and how 
     contributions made under the arrangement will be invested in 
     the absence of any investment election by the employee, and
       ``(II) has a reasonable period of time after receipt of 
     such notice and before the first elective contribution is 
     made to make such election.

       ``(iii) Annual notice of rights and obligations.--The 
     requirements of this clause are met if each employee eligible 
     to participate in the arrangement is, within a reasonable 
     period before any year (or if the plan elects to change the 
     applicable percentage after any increase in compensation, 
     before the increase), given notice of the employee's rights 
     and obligations under the arrangement.
     The requirements of clauses (i) and (ii) of paragraph (12)(D) 
     shall be met with respect to the notices described in clauses 
     (ii) and (iii) of this subparagraph.
       ``(E) Participation, withdrawal, and vesting 
     requirements.--The requirements of this subparagraph are met 
     if--
       ``(i) the arrangement requires that each employee eligible 
     to participate in the arrangement (determined without regard 
     to any minimum service requirement otherwise applicable under 
     section 410(a) or the plan) commences participation in the 
     arrangement no later than the 1st day of the 1st calendar 
     quarter following the date on which employee first becomes so 
     eligible,
       ``(ii) the withdrawal requirements of paragraph (2)(B) are 
     met with respect to all employer contributions (including 
     matching and elective contributions) taken into account in 
     determining whether the arrangement meets the requirements of 
     subparagraph (C), and
       ``(iii) the arrangement requires that an employee's right 
     to the accrued benefit derived from employer contributions 
     described in clause (ii) (other than elective contributions) 
     is nonforfeitable after the employee has completed--

       ``(I) at least 1 year of service, or
       ``(II) in the case of an employee who is eligible to 
     participate in the arrangement as of the first day on which 
     the employee begins employment with the employer maintaining 
     the arrangement, at least 2 years of service.

       ``(F) Certain withdrawals must be allowed.--
       ``(i) In general.--Notwithstanding any other provision of 
     this subsection, the requirements of this subparagraph are 
     met if the arrangement allows employees to elect to withdraw 
     elective contributions described in subparagraph (B)(i) (and 
     earnings attributable thereto) from the cash or deferred 
     arrangement in accordance with the provisions of this 
     subparagraph.
       ``(ii) Time for making election.--Clause (i) shall not 
     apply to an election by an employee unless the election is 
     made no later than the close of the latest of the following 
     payroll periods occurring after the first payroll period to 
     which the automatic enrollment system applies to the 
     employee:

       ``(I) The payroll period in which the aggregate elective 
     contributions made under subparagraph (B)(i) first exceed 
     $500.
       ``(II) The second payroll period following such first 
     payroll period.
       ``(III) The first payroll period which begins at least one 
     month after the close of the first payroll period to which 
     the automatic enrollment system applies.

       ``(iii) Amount of distribution.--Clause (i) shall not apply 
     to any election by an employee unless the amount of any 
     distribution by reason of the election is equal to the amount 
     of elective contributions made with respect to the first 
     payroll period to which the automatic enrollment system 
     applies to the employee and any succeeding payroll period 
     beginning before the effective date of the election (and 
     earnings attributable thereto).
       ``(iv) Treatment of distribution.--In the case of any 
     distribution to an employee pursuant to an election under 
     clause (i)--

       ``(I) the amount of such distribution shall be includible 
     in the gross income of the employee for the taxable year of 
     the employee in which the distribution is made, and
       ``(II) no tax shall be imposed under section 72(t) with 
     respect to the distribution.

[[Page S4120]]

       ``(v) Employer matching contributions.--In the case of any 
     distribution to an employee by reason of an election under 
     clause (i), employer matching contributions shall be 
     forfeited or subject to such other treatment as the Secretary 
     may prescribe.''
       (b) Matching Contributions.--Section 401(m) of the Internal 
     Revenue Code of 1986 (relating to nondiscrimination test for 
     matching contributions and employee contributions) is amended 
     by redesignating paragraph (12) as paragraph (13) and by 
     inserting after paragraph (11) the following new paragraph:
       ``(12) Alternate method for automatic contribution 
     trusts.--A defined contribution plan shall be treated as 
     meeting the requirements of paragraph (2) with respect to 
     matching contributions if the plan--
       ``(A) meets the contribution requirements of subparagraphs 
     (B)(i) and (C) of subsection (k)(13);
       ``(B) meets the notice requirements of subparagraph (D) of 
     subsection (k)(13); and
       ``(C) meets the requirements of paragraph (11)(B) (ii) and 
     (iii).''.
       (c) Exclusion From Definition of Top-Heavy Plans.--
       (1) Elective contribution rule.--Clause (i) of section 
     416(g)(4)(H) of the Internal Revenue Code of 1986 is amended 
     by inserting ``or 401(k)(13)'' after ``section 401(k)(12)''.
       (2) Matching contribution rule.--Clause (ii) of section 
     416(g)(4)(H) of such Code is amended by inserting ``or 
     401(m)(12)'' after ``section 401(m)(11)''.
       (d) Definition of Compensation.--
       (1) Base pay or rate of pay.--The Secretary of the Treasury 
     shall, no later than December 31, 2006, modify Treasury 
     Regulation section 1.414(s)-1(d)(3) to facilitate the use of 
     the safe harbors in sections 401(k)(12), 401(k)(13), 
     401(m)(11), and 401(m)(12) of the Internal Revenue Code of 
     1986, and in Treasury Regulation section 1.401(a)(4)-3(b), by 
     plans that use base pay or rate of pay in determining 
     contributions or benefits. Such modifications shall include 
     increased flexibility in satisfying section 414(s) of such 
     Code in any case where the amount of overtime compensation 
     payable in a year can vary significantly.
       (2) Application of requirements to separate payroll 
     periods.--Not later than December 31, 2006, the Secretary of 
     the Treasury shall issue rules under subparagraphs (B)(i) and 
     (C)(i) of section 401(k)(13) of such Code and under clause 
     (i) of section 401(m)(12)(A) of such Code that, effective for 
     plan years beginning after December 31, 2006, permit such 
     requirements to be applied separately to separate payroll 
     periods based on rules similar to the rules described in 
     Treasury Regulation sections 1.401(k)-3(c)(5)(ii) and 
     1.401(m)-3(d)(4).
       (e) Section 403(b) Contracts.--Paragraph (11) of section 
     401(m) of the Internal Revenue Code of 1986 is amended by 
     adding at the end the following:
       ``(C) Section 403(b) contracts.--An annuity contract under 
     section 403(b) shall be treated as meeting the requirements 
     of paragraph (2) with respect to matching contributions if 
     such contract meets requirements similar to the requirements 
     under subparagraph (A).''.
       (f) Preemption of Conflicting State Regulation.--Section 
     514 of the Employee Retirement Income Security of 1974 (29 
     U.S.C. 1144) is amended by inserting at the end the following 
     new subsection:
       ``(e) Automatic Contribution Arrangements.--
       ``(1) In general.--Notwithstanding any other provision of 
     this section, any law of a State shall be superseded if it 
     would directly or indirectly prohibit or restrict the 
     inclusion in any plan of an eligible automatic contribution 
     arrangement.
       ``(2) Eligible automatic contribution arrangement.--For 
     purposes of this subsection, the term `eligible automatic 
     contribution arrangement' means an arrangement--
       ``(A) under which a participant may elect to have the 
     employer make payments as contributions under the plan on 
     behalf of the participant, or to the participant directly in 
     cash,
       ``(B) under which the participant is treated as having 
     elected to have the employer make such contributions in an 
     amount equal to a uniform percentage of compensation provided 
     under the plan until the participant specifically elects not 
     to have such contributions made (or specifically elects to 
     have such contributions made at a different percentage),
       ``(C) under which contributions described in subparagraph 
     (B) are invested in accordance with regulations prescribed by 
     the Secretary under section 404(c)(4), and
       ``(D) which meets the requirements of paragraph (3).
       ``(3) Notice requirements.--
       ``(A) In general.--The administrator of an individual 
     account plan shall, within a reasonable period before each 
     plan year, give to each employee to whom an arrangement 
     described in paragraph (2) applies for such plan year notice 
     of the employee's rights and obligations under the 
     arrangement which--
       ``(i) is sufficiently accurate and comprehensive to apprise 
     the employee of such rights and obligations, and
       ``(ii) is written in a manner calculated to be understood 
     by the average employee to whom the arrangement applies.
       ``(B) Time and form of notice.--A notice shall not be 
     treated as meeting the requirements of subparagraph (A) with 
     respect to an employee unless--
       ``(i) the notice includes a notice explaining the 
     employee's right under the arrangement to elect not to have 
     elective contributions made on the employee's behalf (or to 
     elect to have such contributions made at a different 
     percentage),
       ``(ii) the employee has a reasonable period of time after 
     receipt of the notice described in clause (i) and before the 
     first elective contribution is made to make such election, 
     and
       ``(iii) the notice explains how contributions made under 
     the arrangement will be invested in the absence of any 
     investment election by the employee.''.
       (g) Effective Date.--
       (1) In general.--Except as provided by paragraph (2), the 
     amendments made by this section shall apply to plan years 
     beginning after December 31, 2005.
       (2) Section 403(b) contracts.--The amendments made by 
     subsection (e) shall apply to years ending after the date of 
     the enactment of this Act.

     SEC. 3. TREATMENT OF INVESTMENT OF ASSETS BY PLAN WHERE 
                   PARTICIPANT FAILS TO EXERCISE INVESTMENT 
                   ELECTION.

       (a) In General.--Section 404(c) of the Employee Retirement 
     Income Security Act of 1974 (29 U.S.C. 1104(c)) is amended by 
     adding at the end the following new paragraph:
       ``(4) Default investment arrangements.--
       ``(A) In general.--For purposes of paragraph (1), a 
     participant in an individual account plan meeting the notice 
     requirements of subparagraph (B) shall be treated as 
     exercising control over the assets in the account with 
     respect to the amount of contributions and earnings which, in 
     the absence of an investment election by the participant, are 
     invested by the plan in accordance with regulations 
     prescribed by the Secretary. The regulations under this 
     subparagraph shall provide guidance on the appropriateness of 
     designating default investments that include a mix of asset 
     classes consistent with long-term capital appreciation.
       ``(B) Notice requirements.--
       ``(i) In general.--The requirements of this subparagraph 
     are met if each participant--

       ``(I) receives, within a reasonable period of time before 
     each plan year, a notice explaining the employee's right 
     under the plan to designate how contributions and earnings 
     will be invested and explaining how, in the absence of any 
     investment election by the participant, such contributions 
     and earnings will be invested, and
       ``(II) has a reasonable period of time after receipt of 
     such notice and before the beginning of the plan year to make 
     such designation.

       ``(ii) Form of notice.--The requirements of clauses (i) and 
     (ii) of section 401(k)(12)(D) of the Internal Revenue Code of 
     1986 shall be met with respect to the notices described in 
     this subparagraph.''
       (b) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to plan years beginning after December 31, 2005.
       (2) Regulations.--Final regulations under section 
     404(c)(4)(A) of the Employee Retirement Income Security Act 
     of 1974 (as added by this section) shall be issued no later 
     than 6 months after the date of the enactment of this Act.
                                 ______