Will the baby boomers be the only generation to retire with 401(k) plans? It could happen.
In late February, many of the nation's biggest thinkers on retirement got together in a Senate hearing room to discuss the future of pensions and retirement. There were representatives of unions, employers, financial services providers, government agencies and consumer groups. And the only thing they all seemed to agree on was this: The 401(k) plan has been sort of a failure.
Those are strong words, and probably overstate the case. Current and future retirees now have some $4.3 trillion for retirement that wouldn't be there if it weren't for their 401(k) and other defined contribution accounts, so it's hard to declare them a complete failure.
But policymakers are now looking beyond the once-vaunted 401(k) because it has two significant shortcomings:(1) It's not powerful enough to secure the retirements of low-income workers who can't afford to stash away enough money; and (2) It leaves each accountholder alone to manage risks. Without being able to pool risk, participants have to settle for lower returns and lower withdrawals.
That cuts the amount that they can spend in retirement, and reduces the likelihood that their money will last until they die.
There is one other reason that retirement analysts are rethinking the 401(k). Financial services firms -- the mutual funds, insurance companies and investment managers who currently are holding that $4.3 trillion for the nation's workers -- don't want to hand it over when the baby boom generation asks for its cash.
There are a lot of proposals and products floating around now that are designed to address these shortcomings and issues. The Obama Administration is trying to encourage workers to think about products (like insurance policies and other investment vehicles) that could guarantee workers lifetime income.
One type of policy proposal would divert 401(k) funding (either prospectively, or, in some cases, using existing assets) to buy into more pension-like plans. Hank Kim of the National Conference on Public Employee Retirement Systems is proposing that states, already used to running efficient pension plans, could run private pensions for small employers. Plans advanced by a broad spectrum of experts, including Teresa Ghilarducci of the New School for Social Research, C. Eugene Steuerle of the Urban Institute and Richard Shea of Covington & Burling, would compel employees and employers to put money towards pension-like guaranteed plans.
Already in the market are products designed to convert existing 401(k) balances into lifetime money streams, and those products are coming on strong. Subsidiaries of insurers like Prudential Financial Inc and ING Groep NV are offering hybrid products within 401(k) plans that seem like annuities but offer greater freedoms: Both will guarantee lifetime income off of 401(k) assets for a 1 percent annual fee, but participants get some growth and can change their minds and withdraw assets at any time.
Other investment companies, like Vanguard, offer mutual funds that will automate distributions (though not guarantee lifetime income) for investors. Retirement Engines, an independent advisory company, offers a retirement income program through 401(k) plans that is designed to last a lifetime, though it stops short of that guarantee.