As part of a new law designed to encourage more people to save for retirement, the U.S. Department of Labor has proposed rules to guide companies that automatically enroll workers in certain retirement savings plans, including a 401(k).

The Pension Protection Act of 2006, signed recently by President Bush, made it easier for companies to force employees to save for their retirement. I use the word “force,” but don’t mean it in a negative way. After all, traditional pensions are about as rare as a belt on many a young teenager’s pants. Both are left hanging.

Thus the 401(k) and similar employer-sponsored retirement plans were born.

For the most part, workers are signing up for them, electing to take pre-tax dollars and invest them in various investment options.

But there are still holdouts. About one-third of eligible workers do not participate in these defined-contribution plans.

To encourage workers to save, some employers decided to automatically sign up workers. The theory: Once you enroll employees in a 401(k), most won’t opt out.

The Labor Department is proposing rules for companies that enroll employees automatically:

l Companies must give employees and beneficiaries 30 days notice before money is invested.

l Companies must be clear about available investment options, and how workers can opt to direct their contributions into other options.

l If an employee’s contributions are placed in a default investment option, he or she can’t be penalized financially if the money is switched to a different option.

l Participants and beneficiaries must have the same opportunities to move money out of the default choice with the same frequency available to other plan participants.

l Default options must be diversified to minimize the risk of large losses.

l An employee’s money must be invested in a “qualified default investment alternative,” or QDIA. Under the Labor Department proposal, a QDIA has to be a life-cycle or targeted-retirement-date fund, a balanced fund or a professionally managed account.

Typically, companies that automatically enroll employees put their contributions in either a money market mutual fund or a stable value fund, according to Dallas L. Salisbury, president and CEO of the non-profit Employee Benefit Research Institute. (A stable value fund generally has returns that are a few percentage points higher than a money market fund.)

The new choices outlined by the Labor Department are aimed at helping employees gain greater returns over the long term. However, Salisbury is concerned that employees who cash out of their retirement accounts in the short term will be subject to wild swings in the market and could end up losing money.

Salisbury said the options should allow plan sponsors to default to the more conservative money market and stable value funds.

Overall, I support automatically enrolling people in a retirement savings plan. Nobody is locked in and this is an example of where inertia could help folks in the long term.