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

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 [3] 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 [4] 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 [5]. 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 [6].

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