The future of retirement? 401(k)s that look like old-fashionedpensions by ferujkll sdff


The future of retirement? 401(k)s that look like old-fashionedpensions by FERUJKLL SDFF
Article Posted: 11/10/2013
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The future of retirement? 401(k)s that look like old-fashionedpensions

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One of the biggest flaws in most people s retirement plan issomething that previous generations rarely worried about: monthlyincome guaranteed for life. But the fix is in, and before long your401(k) may look a lot more like your dad s pension. That s a good thing. Traditional pensions that pay a set monthlyincome to retirees, based on their wages and length of service,were once the foundation of retirement. Along with Social Security,this benefit covered the bulk of a retiree s fixed costs untildeath.

No worries. Personal savings (such as those in a 401(k)plan) were simply gravy. ( MORE: Don't Fall For a Facebook IPO Scam ) But that formula has been turned upside down. Only one-in-threeworkers under age 35 are even eligible for a (greatly reduced)traditional pension benefit — and just 8% of all workersexpect such a pension to be their main source of financialsecurity. Instead, today s workers will have to lean heavily ontheir own savings, ideally salted away over time in tax-deferredaccounts like 401(k)s and IRAs.

That raises the specter of vast numbers of Americans outlivingtheir bank accounts which is a crisis on both the personal andpolicy levels. A stunning 49% of Americans say they aren'tcontributing to any retirement plan, according to a new survey conducted by LIMRA, atrade association for the financial services industry. With retirement Armageddon on the horizon, we are finally getting ameaningful response on a large scale. Big employers have begunexploring efficient ways for workers to shift 401(k) assets into aninvestment option that guarantees income for life making the401(k) more like a traditional pension.

One option, which has beenaround for a long time, is an insurance product known as anannuity, where you pay maybe 30% of your 401(k) balance in returnfor a lifetime income stream. But more sophisticated products arein the mix, too, seeking to offer more generous income streams forsimilar amounts of money and risk. One in five employers expect to introduce such an option in thenext 12 months, according to the 2012 BlackRock Retirement Survey.That would double the number already offering such an option. Atnearly every meeting we go to this is something we talk about, says Chip Castille, head of BlackRock s defined contribution groupin the U.S. and Canada.

( MORE: The American Dream Gets Another Facelift ) The benefits of such a shift would be profound, even beyond theprovision of economic necessities. The BlackRock survey found thatretirees with a guaranteed income stream are far more confidentabout their finances. Other surveys have found that those with aguaranteed income stream are happier, too. One study found thatretirees with a traditional pension are more content than thosewith the same level of wealth but no pension, and that retireeswho have both a pension and a 401(k) are even happier.

Adding a lifetime income option to 401(k)s could have anotherbenefit as well: improving our savings rate. Many of those who arenot putting away money now have shied away from 401(k) plans inpart because the plans have been dead money for a dozen years. Thestock market has been a bust. Workers might save more if they feltmore certain about the benefits.

Nearly all workers believe their 401(k) plan should have aguaranteed income option and three-in-four employers believe it istheir responsibility to provide one, BlackRock found. Thisrepresents a seismic shift in thinking, and it is occurringthroughout the financial and employer community. Virtually all ofthe big players are looking at adding a sensible annuity option totheir plans and educating workers as to how that option can best beincorporated in their own strategy, says a BlackRock spokesman. Just a few years ago, employers were reluctant to even considerannuity-like options.

They were seen as too conservative; 401(k)plans were meant to build assets over the long haul. But as 401(k)plans emerged as the prime source of savings for most workers, thisview softened. The 401(k) plan, once the gravy, is now the meat andpotatoes of retirement security. As such, a guaranteed incomecomponent is seen as appropriate and, indeed, the federalgovernment has begun to openly encourage employers to build oneinto their plans. ( LIST: 10 Smarter Ways to Reach Your Retirement Goals ) It is important for savers to have some form of guaranteed incometo prevent them from running out of money, says CatherineCollinson, president of the Transamerica Center for RetirementStudies.

The idea clearly resonates with workers and there is alot of movement in Washington to help plan sponsors make theseoptions more widely available. Some 43% of American adults believe retirement income is such animportant issue that it should be a priority for the next presidentand congress, according to a Transamerica survey Redefining Retirement: The New Retirement Readiness . They want the government to encourage 401(k) plan sponsors tooffer to pay benefits in a form that guarantees a set level ofmonthly income, regardless of how long one lives. The push for guaranteed lifetime income has at least one bigobstacle.

Current interest rates are so low that purchasing monthlyincome through an annuity is unusually expensive. One risk isthat savers given this option will switch at just the wrongtime converting low 401(k) balances from the recession intoguaranteed income at the priciest levels in many years. That underscores the central difference between your dad s pensionand whatever your 401(k) offers. Your 401(k) is self-funded andself-managed. You must determine what makes the most sense and howmuch to pay for it.

The income option is a welcome addition to themenu. But a no-brainer it is not. MORE: What Will Replace the 401(k)?.

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