Some of the changes are driven by the realization that many individuals haven’t saved enough to get them through retirement. In addition, the market’s volatility has reduced balances yet again and prompted many to pull their money out of the market.
“Given the low balances in 401(k) plans, if our industry doesn’t help provide better solutions, at some point the government will come under pressure to do something,” says Chuck Cornelio, president of defined contribution at Lincoln Financial Group. “Sometimes government solutions are good sometimes they’re not.”
Here’s a snapshot of some new ideas:
Pension-like income
Companies are trying to come up with ways to offer account-holders a guaranteed income stream, much like traditional pension plans once did.
The latest effort comes from Hartford Financial Services Group, which has designed a plan that allows 401(k) account-holders to buy what it calls income shares. Each share is guaranteed to pay $10 of monthly income for life beginning at age 65. A worker could buy 50 income shares during working years to generate $500 a month in retirement, for example.
The cost of each income share is based on the person’s age, current interest rates and is predicated on retirement at age 65. The amount of income from each unit will increase if the participant retires later or decrease if the participant retires earlier. Retirement plan participants can buy shares through regular payroll deductions and lump-sum payments.
The income is provided from an annuity that’s an investment option within the 401(k) plan.
Here’s an example: Let’s say Mary, 30, has an annual salary of $40,000 and saves $200 a month in her 401(k). She wants to be sure she has $500 a month in retirement to cover basic expenses. To do that she could contribute $86 a month toward the purchase of income shares until age 65. Her total contribution would be $36,120, yet she would be paid a total of $120,000 from age 65 to 85 — or $500 a month. If she lives longer, the guaranteed income would be $180,000 from age 65 to 95.
The option should be viewed as another investment choice within a 401(k) plan, said Patricia Harris, director of retirement income products at Hartford.
The concept was to create an option that fills the space of a pension plan for 401(k) participants, but enables workers to control and manage the money on their own, Harris said.
Just for small businesses
The Vanguard Group has launched a 401(k) plan for small businesses, which are defined as those with assets of less than $20 million. The plans include index funds and target-date funds. Employers pay one fee for record keeping and administrative costs.
Vanguard says one of its small business plans — with a mix of its index funds and some active funds, about $5 million in assets and an average account balance of $50,000 — would charge 0.32 percent of plan assets. The industry median for small plans between $1 million and $10 million in assets is 1.27 percent.
To keep costs down, the plans primarily feature index funds — those that closely mirror the performance of a broad index such as the Standard & Poor’s 500. They will include target-date funds, which are diversified funds with asset allocations that become more conservative as the investor ages.
Socially responsible investing
The number of 401(k) plans offering investment choices focusing on companies that promote environmentally sustainable practices, human rights, and diversity — known as socially responsible investing or SRI — could double in the next few years, according to a new report.
Business benefits consultant Mercer and the Forum for Sustainable and Responsible Investment surveyed more than 400 companies offering 401(k) plans earlier this year. While 14 percent surveyed said they already offer one or more SRI options, an additional 13 percent said they are discussing an SRI option or intend to add one within the next two to three years. More than 84 percent said they expect demand for socially responsible options to increase over the next five years.
Those that offer such options say they do so to align their retirement plans with their company’s goals and to meet employee demand.
Automatic enrollment
Human resources consultant Aon Hewitt says nearly 76 percent of eligible workers participated in their company’s 401(k) plan in 2010; the highest level since the company began tracking data. It credited automatic enrollment with the increased participation.
Auto enrollment is particularly important for low-income minorities, who are far less likely to participate in a plan under voluntary enrollment. The participation rate in voluntary enrollment plans among black workers earning less than $30,000 a year is only 35 percent. It is 36 percent for Hispanic workers in the same income group. These rates jump to 93 percent for blacks and 94 percent for Hispanic workers under automatic enrollment.
Source: http://www.knoxnews.com/news/2011/nov/07/retirement-plan-providers-try-new-401k-ideas/
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