A shift to retirement readiness occurring in 401(k) plans

Guaranteed-income benefits becoming more popular in target date funds

Jun 10, 2012 @ 12:01 am

So your clients think they are going to work longer and retire later? Maybe not.

With America's workforce graying, many employers are starting to examine the high costs of keeping older workers on the payroll. In short, if older workers can't afford to retire, companies are becoming worried about their ability to remain competitive.

“Corporate finance officers are absolutely concerned that if employees delay retirement, it will affect their companies' ability to control workforce costs,” said Jamie Kalamarides, senior vice president of institutional investment solutions for Prudential Retirement, which recently sponsored a survey on the issue.

Older workers hanging around longer than planned can limit companies' ability to hire new staff members and provide advancement opportunities for existing talent.

The employers' well-placed concern is actually good news for employees. It has prompted some leading 401(k) plan providers and sponsors to take a serious look at how to help workers convert retirement savings into retirement income, and in the process, show them that they can afford to retire.


Senior finance executives are exploring stable-value funds, guaranteed-income products and enhancements to target date funds to improve participant outcomes.

Building on the success of automatic enrollment and auto-escalation features that help boost the number of participants in 401(k) plans, employers are looking to similar features to make the transition to retirement easier.

“I think the biggest trend we're seeing is including guaranteed-minimum-withdrawal benefits within target date funds,” Mr. Kalamarides said.

Adventist HealthCare and Konica Minolta Holdings Inc. recently added guaranteed-lifetime-income features to their target date retirement plans.

But what about the fees? Aren't GMWB features expensive?

How will that play in the 401(k) market amid the obsession with fees triggered by the new Labor Department disclosure rules?

That isn't a problem, Mr. Kalamarides said.

Prudential, for example, charges a flat 1% fee for its IncomeFlex Target product, and the fee is fully disclosed. There are no sales commissions for these in-plan products, and the only other fees are the underlying target date fund expenses.

The desire of many workers for predictable retirement income indicates that the extra fee may be worth it.

In fact, a separate Bank of American Merrill Lynch study found that 82% of employees would be willing to give up 5% or more of their salary if it meant having reliable income to help them live comfortably during their later years.

“The biggest surprise of this study is that employees are so looking for guaranteed income in retirement that they say they would give up current income for future income streams,” said Kevin Crain, head of institutional retirement and benefit services at Bank of America Merrill Lynch. “It shows they are willing to take less return in exchange for more-predictable income.”

Another option for modifying target funds, which were criticized for steep losses for near-retirees during the 2008 market crash, is to adjust the glide paths so that they terminate in more conservative retirement income funds that focus on preserving capital and producing income.


Mr. Crain and Mr. Kalamarides agree that the most significant step that plan sponsors and providers can take to improve retirement outcomes is to translate 401(k) account balances into the equivalent of monthly income in retirement.

Proposed legislation in the House and Senate would require 401(k) plans to provide employees with similar information on their quarterly account statements, and the Labor Department is working on similar proposed rules.

Mr. Crain conceded that employers and 401(k) providers are feeling the heat of intensified scrutiny from lawmakers, regulators and the general public about the efficacy of 401(k) plans as stand-alone retirement solutions.

Of particular concern is the threat by some congressional budget cutters to reduce or eliminate the tax breaks for 401(k) contributions, a move strongly opposed by most plan providers, employers and employees.

“We need to protect this system,” Mr. Crain said.

“Ultimately, we have to demonstrate the health and vibrancy of the 401(k) system by showing how it can create meaningful retirement income for participants,” he said.

It is about time. Amazingly, the majority of U.S. companies don't measure the effectiveness of retirement plans for their employees, according to a recent Wells Fargo & Co. survey of 450 companies.

If they are spending so much money on retirement plans, shouldn't they know if the plans are working? And if they aren't, isn't it time to figure out how to make them better?

Mary Beth Franklin (mbfranklin@investmentnews.com) welcomes your comments and suggestions for column topics.


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