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Pro-Saving Initiatives: Convert Sick & Vacation Days to 401(k), Auto-enroll Retirement Plans

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To say that I was surprised to hear about the recent pro-saving initiatives announced by President Obama today would be an understatement. In the last year, the government has been taking steps to stimulate the economy. To stimulate the economy, you need people to spend money. One of the slickest ways to do that is to reduce the incentive to save, or reduce interest rates. When the Federal Reserve lowered the target interest rate to essentially 0%, banks followed in lowering their interest rates too. Once lofty 5% and 6% APY interest rates are now under 2% across the board. The government didn’t want you to save, they wanted you to spend and put money back into the economy.

When I read this CNN story about some pro-saving initiatives, I was surprised because it’s anti-stimulus. It’s responsible personal finance but the economy is about businesses, not about individuals. So what were some things being announced?

Retirement plan auto enrollment for small and medium-sized employers was the headline pro-saving initiative. Auto-enrollment is currently available for large companies able to go through the administrative process, it’s more difficult for smaller companies to parcel out time to implement it. When you consider the average retirement savings by age is incredibly low (as evidenced by the comments), this is a great step towards fixing that problem.

Receive your income tax refund as U.S. savings bonds. I don’t understand why anyone would do this.

Convert sick days and vacation time to 401(k) contributions. I like this idea. While you might argue that Americans work too much (there was some statistic a few years back saying Americans work the most out of any developed country), I think this is a great option to have. As much as we may not like it, we’re usually only able to take vacations when our work says we can take vacation. The struggle usually happens at the end of the year when you’re trying to finish a project and you have vacation days you can’t roll over into the next year. The option of pushing it into a 401(k) contribution would be fantastic.

I would love to see the equivalent of UK’s cash Individual Savings Accounts. In an ISA, you can save up to £3,600 tax free each year into a cash account. It’s a bit like an IRA except, with certain exceptions, there’s no penalty for withdrawals. If you don’t want something as complicated as that, then I’d like to see the IRS tax deposit account interest at the dividend rate instead of at your marginal income tax rate.

Regardless of what happens, I’m glad we’re going in this direction again.

{ 9 comments, please add your thoughts now! }

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9 Responses to “Pro-Saving Initiatives: Convert Sick & Vacation Days to 401(k), Auto-enroll Retirement Plans”

  1. Andrew says:

    In California, you accrue vacation days every pay period and can never lose them. If you leave your job for any reason (not sure about death, but probably), they get paid out in your final check at your current wage rate, regardless of what your wages were when you earned them. Your employer can (and most do) cap your vacation accrual. Mine recently lowered the cap from 360 to 250 hours, and every place else I’ve worked the cap has been lower. Once you reach the cap, you no longer accrue vacation hours until you use some, but the ones you’ve already accrued are yours forever. They’re part of your compensation and can never be taken away.

    I’ve heard about states where you get your whole year’s allotment on January 1 and lose any unused on December 31. I’ve also heard that in those states, managers routinely deny all vacation requests, so basically your vacation time is worthless.

    • Scott says:

      What happens if your company goes broke and you’re out of a job? Saved up vacation doesn’t mean much then if you don’t get it or have to wait for a bankruptcy filing to settle out. USE YOUR VACATION PEOPLE! As for your comment about other states, if managers deny vacation time, go work somewhere else because you’re in the bottom 1% of the crappy jobs pool.

      • Andrew says:

        In California, vacation is part of your compensation, so it will be paid out ahead of other creditors’ claims, just as wages are.

  2. zapeta says:

    I’m lucky enough that at my employer once the vacation is earned it is ours and any we don’t take is paid out when you leave the job. If it wasn’t that way it would be nice to have the unused roll in to retirement.

    Automatic enrollment is a great idea, hopefully that passes.

  3. Myra says:

    Jim, just to be clear, Congress sets the tax rate; the IRS just administers taxes and collect them. I think taxing interest at lower rates is a good idea, but it’s up to Congress to enact that rather than the IRS (which gets plenty of its own blame!).

  4. Anthony says:

    I’m one of the unfortunate ones. I have given a certain amount of sick/vacation days, accrued at the end of the month. (Kinda tricky because the end of the month does not coincide with pay periods.)

    I am under the “use it or lose it” policy, although I do have until January of the following year to use my days.

    I was excited when Jim mentioned this possibility for converting days to 401(k) contributions… HOWEVER, according to the article…

    “[A] company that doesn’t compensate employees for unused vacation and sick leave, under “use it or lose it” policies, would not be required to start compensating employees for unused time through 401(k) contributions.”

    Does not look like I can get compensated for my unused days.

  5. Scott says:

    In one sentence, my general feelings are that usused vacation days beyond, say, one week are screwing yourself on the front end and the company on the back end (when you leave or retire from the company) so don’t be a corporate hero and use your vacation each year like you were intended to do.

  6. I’ve never really had to deal with planning vacation days since I am a teacher, but the conversion to 401K contributions is an interesting idea.

  7. jim says:

    “there was some statistic a few years back saying Americans work the most out of any developed country”

    The data on the wiki page shows that South Koreans work the most hours. See:

    You might be thinking of worker productivity rather than working hours. US workers are often cited as the most productive.

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