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4 ways to build a 401(k) for baby boomers

Allowing in-plan Roth conversions and periodic distributions are among the changes plans could make to better serve older employees.

Feb 14, 2018 @ 10:15 am

By Aaron Pottichen

Retirement plan advisers need to start thinking about how to design 401(k) plans to reflect the increasing numbers of baby boomers in the workforce.

There was a nearly 50% jump in people over the age of 75 in the workforce between 1996 and 2016. Further, only 54% of baby boomers had any retirement savings in 2017, according to a recent Insured Retirement Institute study; that was the lowest level in the seven years IRI has published the report.

These numbers tell us two things. First, participants in 401(k) plans are likely to start resembling those whom we expect to be retired. Second, many plan designs and products need to be updated for a part of the population that is older.

Here are a few things for advisers to keep in mind.

Allow in-plan Roth conversions.

A surprisingly large number of retirement plans that we review don't allow participants to convert pretax dollars to Roth after-tax dollars. Such a feature can be a valuable planning tool for many older participants, and for many plan sponsors this is a no-cost and low-maintenance item to add to plan design.

This feature is important because it allows those participants who have accumulated substantial pretax savings to convert some of those holdings to Roth savings, and pay the tax at the end of the year. The participant can do this without having to withdraw assets from the plan.

This is particularly helpful for older employees, who may be at a lower tax rate than in previous years.

Allow periodic distributions for participants over age 59½.

Older participants are likely to have large sums of assets accumulated in their 401(k), and that nest egg could be a considerable part of their retirement funds. By allowing periodic distributions of those assets for employees over age 59½, plan sponsors are providing them with valuable access to those funds they may want to use for college tuition, vacation homes, etc.

Having this feature available allows participants more flexibility in when and how they can access their retirement funds, and is particularly helpful for older employees who need access to their retirement funds but don't plan on retiring in the near future.

Include a target-date fund with a "through" glidepath.

Target-date funds are becoming a larger portion of total retirement plan assets. The backbone of a target-date fund is the glidepath, which dictates a fund's allocation between equity and fixed income at any given time. (The further away from retirement a participant is, the greater the equity allocation.)

Some of these glidepaths stop changing once the fund reaches its target date, while others continue to decrease their equity exposure after reaching the target date. These are respectively known as "to" and "through" funds.

"Through" glidepaths are generally more appropriate for plans with large populations of boomers, instead of "to" funds whose equity exposures remain stagnant. "Through" glidepaths generally may be better for participants who have hit the theoretical target date and are continuing to work, because their equity exposure will continue to decline. The declining equity exposure of the "through" glidepaths may allow them to retain a slightly higher equity exposure while they continue working, as opposed to a "to" glidepath, which may have a lower equity landing point at its target date.

Additionally, plans with "to" funds should be used for plans with younger participant populations that don't work past the target date (usually when a participant turns 65) or that don't have participants leave their assets in the plan during retirement.

Provide Social Security planning.

Roughly 52% of people over 65 years old get at least half of their family income from Social Security benefits, according to the Social Security Administration. Since such a large portion of the population relies heavily on this one source of income, it is important that people receive education on when to claim Social Security in order to maximize benefits.

There are a variety of third-party tools and vendors that advisers can pull in to help plug this education gap, but the key is to do something. With an estimated 10,000 people turning 65 every day, there is a huge opportunity to make sure people get the right education at the right time.

(More: Younger baby boomers face hurdles as they approach retirement)

Aaron Pottichen is the retirement services president at CLS Partners, an Austin, Texas-based financial advisory firm.

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