Demise of the 401(k): About Time?

The last couple of  generations had been lead to believe the tool of choice for retirement savings is  the 401(k).  A savings plan made available through employers and created by the U.S. tax code.  Modern financial advisors are speaking out against that as the mainstay to retirement planning.  

One financial expert is Todd Tresidder – financial coach and owner of Financial Mentor.  The tagline for his firm is, “Financial Freedom for Smart People.”

I called the traditional investment approach as putting money into your 401(k).  But for Tressider disagreed.  “I would define the traditional investment approach a little differently form what you said. Relying on the 401(k) savings approach it is actually fairly new because it came with the destruction of  pension system. The traditional investment approach in my mind is passive investing, using indexed funds and conventional asset allocation.”

Today employers are being called upon the to implement a new and improved retirement income program.  The American Society of Actuaries just released a report called The Next Evolution in Defined Contribution Retirement.  It  points out, retired workers can easily spend assets at an unsustainable rate when there is no retirement income plan in place, which further exposes them to inflation risks, market volatility and the risk of outliving their assets. While employer sponsored retirement income options are not yet widespread among defined contribution plans, employers are in an advantageous position to help their retiring employees by offering retirement income options.

The report provides employers and plan sponsors with a roadmap on how and why to implement a retirement income program. The report identifies annuities and systematic withdrawals as retirement income generators to consider, as they produce higher amounts of retirement income than simply investment income.

“It is important for people to evaluate all of their options for a lifetime paycheck and to set clear goals of what their retirement plans need to achieve,” said actuary Steve Vernon, FSA, MAAA, consulting research scholar for the Stanford Center on Longevity. “Different retirement income methods produce significantly different amounts of income depending on the method chosen. Employers can help retiring employees understand the pros and cons of each method as well as the amount of retirement income, so retiring employees can make informed decisions.”

The  SOA’s report says a retirement income program might be a low-cost benefit improvement that delivers significant value to older workers. By offering retirement income solutions with institutional pricing instead of retail pricing, employers can significantly increase the amount of retirement income that their employees may receive. Employers will benefit from offering retirement income options through enhanced reputation as a desired employer and corporate citizen, improved worker morale and lower administrative costs, among other benefits.

“A cultural shift is needed to get employers and plan sponsors to include retirement income options as part of defined contribution plans,” said actuary Anna Rappaport, FSA, MAAA, and Chair of the SOA’s Committee on Post-Retirement Needs and Risks. “The report discusses retirees’ needs and plan sponsors’ concerns for building a retirement income mechanism to prevent outliving assets.”

Two of the largest barriers for employers and plans sponsors to add retirement income solutions are administrative complexity and fiduciary concerns. The features of the retirement income generators will vary depending on risk tolerance, economic optimism/pessimism, life expectancy and self-discipline with spending. The report provides plan sponsors with an outline so that they can design a retirement income program and a checklist of questions to ask retirement income providers. It also includes information on administrative and design considerations, issues with offering default retirement income solutions and discussion points on fiduciary liabilities from prominent Employee Retirement Income Security Act (ERISA) attorneys.

For the full report, “The Next Evolution in Defined Contribution Retirement,” visit http://www.soa.org/Research/Research-Projects/Pension/research-2013-next-evol-dc-design.aspx.

 

Category: Blog