In an ideal world, investors would have diverse portfolios including stocks, bonds, mutual funds, exchange-traded funds and annuities to ensure a comfortable retirement.

But the world of retirement planning is far from ideal, and most Americans, if they prepare at all, only use one tool: the 401(k). That, critics say, too often means access to only one type of product: the mutual fund.

"The question is, what is the right combination of tools for the particular investor," said Jeremy Alexander, president and chief executive of Beacon Research, an independent annuity industry data provider based in Evanston, Ill.

"The mutual funds think they have the answer. Insurance companies think they have the answer. ETFs think they have the answer. Everyone thinks they have the answer," he said. "No one has the answer."

That's because the answer is a combination of each of these instruments, he said, tailored to the needs of the specific investor.

The problem is, for the most part, mutual funds remain the only product that can get on to 401(k) platforms, because they're the only type of product most recordkeeping systems support.

"These are old, legacy software programs that are 10, 15 or 20 years old," said Darwin Abrahamson, chief executive of Invest n Retire a company based in Portland, Ore., that offers a retirement system specifically designed for ETFs.

"There is an investment in bringing that recordkeeping technology up to date," said John P. Carbone, managing director with The Hartford. The Simsbury, Conn.-based company, best known for insurance, is working hard to get its annuity-related Lifetime Income product, designed to complement other investments within a retirement plan, on 410(k) platforms. "It's a challenge," he said.

Provisions for automatic enrollment and allocation in the Pension Protection Act of 2006 have made breaking into the growing market more attractive, but there's no sign of recordkeepers budging any time soon.

"I don't think we've seen enough demand from plan sponsors that recordkeepers are going to figure out a way to get their systems to handle these products," said Sam Campbell, director of research at Boston-based Financial Research Corp.

Instead of waiting around for 401(k) providers to adapt their systems, many product providers are adapting their products.

For ETFs, the primary problem is that mutual fund-friendly 401(k) platforms built for once-a-day trading cannot accommodate products that trade like stocks and price throughout the day.

Companies like New York-based Seligman Advisors sidestep such challenges by creating mutual funds that use ETFs as their only underlying investments. The Seligman TargETFund, for example, is a target-date mutual fund that uses a mix of ETFs that change as a worker approaches retirement. Because the underlying funds themselves cost investors only between 23 and 25 basis points in total, compared to between 100 and 200 for their mutual fund-made counterparts, the Seligman fund is less expensive than the typical target- date fund, even with its 98 basis point overlay mutual fund structure.

At Invest n Retire, Abrahamson scrapped the idea of adapting to the old system, and built an all-ETF platform instead.

Abrahamson's patent-pending platform allows investors to own ETFs directly, eliminating the fees added through a mutual fund structure. Also unlike mutual funds, where the net asset value rises and falls as investors jump in and out, ETFs, while liquid, require investors to pay their own trading fees, leaving the fund more stable, said Gary Gastinau of ETF Consultants in Summit, N.J. Since Invest 'n Retire deals directly with exchanges and trades in high volume, investors dodge some of the trading costs and commissions ETFs would carry if they were to trade for themselves.

Abrahamson believes that an increase in awareness about the fees and revenue-sharing agreements mutual funds espouse, amplified by new disclosure regulations from the U.S. Department of Labor, will bring ETFs into the 401(k) space soon. "Corporate executives have not been doing the due diligence," he said. "Now these [impending] lawsuits are going to make them realize, Hey, we need to do this.'"

Unlike the Seligman TargETFund's instant allocation, Invest n Retire's program allows investors to choose ETFs for themselves. "We are living longer these days. Participants can no longer afford fixed income when they retire; most still need growth in their portfolios," he said.

Companies like The Hartford help address investors' concerns about outliving their savings through its 401(k)-ready Lifetime Income product. For every share of the Lifetime Income product an investor buys, they are assured $10 per month from the retirement date chosen, say age 65, for the remainder of his or her life.

"You're not accumulating. You're buying income," said Patricia Harris, assistant vice president of The Hartford's institutional solutions group. "It's a different animal."

But for the purposes of getting on the 401(k) platform, it works a lot like mutual funds, to which investors are already accustomed. Like a mutual fund in a 401(k), investors can allocate a portion of their savings to buy into the Lifetime Income product, and, like a mutual fund, whatever amount employees put in is the amount they own, because fractional shares are allowed.

But under the hood, it looks more like an annuity. In the interest of preserving the tax advantage, the sum of the shares doesn't actually annuitize until near the date payments start, but the price per share varies according to factors including the investor's age and the rate of inflation, and that price will continue to change over time.

The plan is simple to explain to investors, but like other income-guarantee products from such companies as Genworth and MetLife, recordkeeping has proven a major impediment to getting on 401(k) menus.

But with employees constantly hearing about the impending retirement crisis, Beacon's Alexander is confident demand for such products exists. In turn, he predicts, recordkeepers will respond.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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