The 401(k) market might not see immediate asset inflows from the pension-reform law as the industry might have initially thought. The dismal forecast comes from Lord Abbett Funds Chief Economist Milton Ezrati, The Wall Street Journal reports. The Pension Protection Act of 2006 passed in August was designed to encourage wider participation in defined contribution plans such as 401(k)s. The law also makes it less risky for employers to choose a default 401(k) investment option for their plan and allows employers to increase a participant’s contribution level by one percentage point each year after automatic enrollment up to a maximum of 10%. The industry says, “‘Oh, this is wonderful. They’re going to force these people into the plans and this money is going to flow onto Wall Street,’” said Ezrati. “Let’s not get too optimist about this, guys. It’s going to take some time to develops and it’s not going to be the tidal wave of money you seem to expect.” While some studies have suggested there would be a “tremendous percentage increase in the number of people involved, the dollar flow would be considerably less” than might be expected,” he said. “Our experience with 401(k) plans is that those who don’t participate are either short-time or very new employees, and they tend to be at the low end of the pay scale,” Ezarti said. “There are also people who just allow the minimum, they don’t any extra into the plan.” Ezrati is not suggesting that the new provisions will not eventually benefit the industry, just that it might take a long time for them to have a significant effect on savings and asset flows.
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