How Can We Make 401(k) Plans More Like Pensions?
Regular readers know I'm a fan of traditional defined benefit pensions. They benefit from professional management, pooled risk and efficiency, and they're structured to provide a reliable income stream in retirement. Overall, pensions deliver much more bang for the buck than 401(k) plans.
But pensions are a disappearing breed in the private sector--and mourning their decline won't bring them back.
So a group of industry professionals recently convened a working group, the Retirement 20/20 Initiative, to brainstorm ways to get defined contribution (DC) plans, like 401(k)s, to look -- and behave -- a bit more like defined benefit (DB) plans. The group includes actuaries, economists, employers, participant advocates, investment experts and academic researchers.
The 20/20 initiative, led by the
"Employers, individuals, society and the markets all have a stake in this," says
Here are the five best ideas to emerge from the Retirement 20/20 report:
1. Focus on income, not accumulation.
The 401(k) account statement you receive regularly shows how much you've accumulated, not how that sum translates to income. Retirement 20/20 recommends adding income projections to account statements that show what your balance would look like if converted at retirement to an income stream. The idea here is to get retirement savers to at least think more about income.
2. Create incentives for annuitization.
While most retirement savers prefer taking a lump sum distribution at retirement, tax incentives might convince them to annuitize at least part of the nest egg. Retirement 20/20 recommends preferential tax treatment for annuity income. Another recommendation sketches out a plan to include default annuitization options in DC plans.
3. Better risk-hedging.
The researchers recommend allowing investors to choose a pre-set portfolio that emphasizes fixed income, and much less investment in equities--particularly at retirement. The pre-set portfolio model would permit lower administrative costs and a design that meets target risk goals at retirement. "While this may require that individuals contribute more to achieve the same retirement income, it would also protect them against market crashes," the report notes.
4. Go for stability, not guarantees.
DC plans that offer income conversion options could be made less costly to run by providing something less than an absolute guaranteed benefit -- for example, a benefit with an inflation adjustment feature that can be adjusted over time. Retirement 20/20 suggests another alternative that would have employees work toward a targeted benefit that isn't guaranteed, but structured so that workers who make a certain level of contribution would likely get a defined benefit within 10 percent of the target at retirement.
5. Create fewer, bigger plans.
Unseen fees charged to investors are one of the biggest variables in 401(k) plan performance -- especially at smaller companies. These include investment product fees, administration and record-keeping fees and other charges for investment advisory services, insurance and auditing.
Research by Brightscope.com shows that average 401(k) total plan cost can be as low as 0.20 percent of assets for the largest plans and a whopping five percent for smaller plans.
Retirement 20/20 suggests regulatory changes that would allow more small employers to band together in larger plans sponsored by an entity other than the actual employer; here, it points to the success of
"There's a wonderful opportunity here to drive higher value and better outcomes for plan participants," says
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Personal Finance - How Can We Make 401(k) Plans More Like Pensions?
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