Congress has just passed a pension reform bill that will significantly change the way that 401(k) plans can operate. 401(k) plans allow participants to save money for retirement in tax-free accounts. The problem is that most people are not handling their money choices very well. Even worse, millions of people are choosing not to participate in their employer’s plans at all, putting their retirements at risk.

New rules aim to make it easier for companies to automatically enroll their employees in their company 401(k) plans. The amount of money that can be deducted from employee’s paychecks will be increased. Employers will also be given the option of putting their worker’s money into riskier stock and bond funds rather than low-yielding money market accounts that have long been the default option.

Most of these changes are on track to be implemented in 2008, but some employers have taken steps to implement the changes in their plans already. The changes will also affect 403(b) plans, retirement plans for employees of non-profits and educators.

The features that will likely become common in all plans are as follows:

1. Automatic enrollment: typical pension plans automatically enroll participants but 401(k) plans have traditionally required signing up. Lower-paid and younger workers have a tough time seeing the value of the program over the value of the dollar in their immediate paycheck. 12.1 million people in the U.S. are currently eligible for workplace retirement plans, but don’t participate. Experts say the same inertia that prevents workers from signing up will now work to the advantage of Americans, who, once they are enrolled, probably won’t take the effort to unenroll from the programs.
2. Automatic increases: under the new law, companies are prodded (but not required) to meet certain minimum plan step-ups. The recommended deferral is 3% the first year, 4% the second year, and up to 6% the fourth year. Companies are also encouraged to meet certain minimums for matching funds.
3. Default investments: currently, the default investment is a low-yielding money-market account. Most people never move their money out of that account and end up with inadequate returns on their savings.
4. Advice: perhaps the most controversial of the new law’s provisions, companies are now allowed to offer specific investing advice. This advice must be based on a computer model and be certified as bias-free.