Complain all you like about the 401(k) plan, but it is not going away.
True, 401(k)s have not proved to be the perfect substitute for pension plans. Workers tend not to use them to full advantage, and employers don't always follow best practices in designing them. Participants' account balances took a terrible beating in the market meltdown of 2008, jeopardizing the retirement ambitions of millions of aging baby boomers. When Time magazine recently devoted a cover story to "Why It's Time to Retire the 401(k)," it may have engaged in some journalistic hyperbole, but it also captured Middle America's growing angst over the fate of a critical long-term investment.
But there is good news: thanks to a raft of innovative new products, plan-design changes, and regulatory safe harbors, it is easier than ever to build a low-cost, high-performing 401(k) plan that gives your employees a fighting chance of achieving financial security in retirement, while simultaneously protecting you from missteps that could lead to messy and potentially expensive lawsuits. Automatic enrollment makes it easier to get people into the plans who might have neglected to join in the past. Target-date funds give them an easy way to invest in a professionally managed, diversified investment portfolio. And the Pension Protection Act of 2006, which led to the designation of certain approved types of funds as "qualified default investment alternatives" (QDIAs), offers a fiduciary safe harbor to plan sponsors, allowing them to make investment decisions on behalf of participants who don't make them on their own.
The bad news? Get any of this wrong, and you are more likely than ever to be held accountable for cleaning up the mess. Capitol Hill and the Department of Labor are in a race to drive down fees and drive up transparency in the 401(k) market, and however noble the intentions, any new rules they hand down will create new compliance challenges for plan sponsors.
Meanwhile, plaintiff's lawyers aren't waiting on legislators or regulators to drive change. Over the past several years they have filed dozens of lawsuits on behalf of plan participants alleging that plan sponsors failed their fiduciary duties. Among other things, they claim sponsors paid excessive fees to service providers and populated their plans with costly and underperforming investment options. Some of those lawsuits have been dismissed, but many others are still winding their way through the courts, and at least one ended in a settlement that cost the defendant tens of millions of dollars.
Whether you've got front-line responsibility for your organization's 401(k) plan or play an advisory role, here are four 401(k) trends to watch, and perhaps take advantage of, in 2010:
New Retirement Income Solutions
One of the biggest complaints about 401(k) plans is that they function purely as asset accumulation vehicles, with no mechanism for helping participants prudently draw down their savings in retirement. Over the past several years, a number of vendors have attacked this problem by introducing annuities that function as investment options within a plan.
Some work like variable annuities with guaranteed- minimum-withdrawal benefits: the participant is assured no loss of principal while saving for retirement, and can then take annual withdrawals equal to, say, 5% of their account value at retirement, even if their account balance subsequently falls to zero. Others are essentially deferred annuities that allow participants to purchase future chunks of guaranteed income. To date, these products have attracted limited interest from plan sponsors, but look for that to change as Congress, regulators, and vendors press for better solutions.
"Variable annuities have been quite successful in the individual market, but the ones applied to the retirement market to date have been retrofitted; they weren't originally designed to fit into a defined-contribution plan like a 401(k)," observes Charlie Nelson, president of plan provider Great-West Retirement Services. "Some say you have to be in the product for five years, or, if your plan sponsor changes providers, you lose your benefits. Or they might say we will refund your money if you leave. Well, I don't want a refund of my money; I want the guarantee."
Nelson says the next generation of products, including an offering from Great-West, will be designed to fit inside a defined-contribution plan and will take into account portability at the plan level. They will allow participants to invest in more than one company's investment option, lock in high points of the particular fund or target-date series in which they have invested, and then draw down that amount over their lifetime. Look for some of these second-generation products to debut this month or early in 2010, Nelson says.
Better Investment Options
In the wake of 2008's financial-market meltdown, many plan sponsors are reassessing their plan's investment lineup, beginning with the target-date funds that so many have installed as their default investment option. "It's the preeminent issue right now," says David Wray, president of the Profit Sharing/401(k) Council of America (PSCA), a nonprofit employer group. "Companies are definitely interested in seeing if they can do better with their target-date funds. It's not that they are unhappy with them, but they want to do better."
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