With news that the economy might be on the mend and that roughly two-thirds of employers are considering reinstating 401(k) matches in the next 18 months, it is not inconceivable that a new 401(k)/pension hybrid that becomes available to employers on Jan. 1, 2010 could gain traction, Kiplinger’s reports.
Dubbed a “DB(k),” the retirement savings plan offers most of the features of a 401(k)—along with a small guaranteed income stream of 1% of a worker’s final average pay for up to 20 years of service. While a DB(k) is certainly nowhere near as generous as a pension, its guarantee feature could prove tremendously popular among employees.
“You take the best of the defined benefit concept and put it together with a 401(k) plan,” said Lynn Dudley, senior vice president for policy at the American Benefits Council.
The automatic enrollment feature of the DB(k) would shift 4% of an employee’s pay into the plan and require employers to match at least 50% of 2% of employees’ contributions.
To entice employers to participate, the government would exempt contributions from the highest-paid workers from rules that ensure the retirement plan is not skewed in favor of them. It also eliminates the duplicate paperwork that would be required for separate DB and 401(k) plans.
The DB(k) was made possible by the Pension Protection Act of 2006. With its availability around the corner, it could not come at a better time: The market downturn has underscored the fact that 401(k)s were never designed to be the sole leg of a worker’s retirement savings plan, that individuals’ investment choices can prove woefully poor in a severe downturn and that most Americans are saving woefully too little.
As Kiplinger’s puts it, “While the economy continues to struggle, interest in DB(k)s will be light. With an unemployment rate soaring toward 10%, there’ll be no swell of companies rushing to adopt DB(k)s when the gate opens. But we expect the concept to pick up steam as the economy strengthens and competition for good workers again becomes keen.”
Already, pension industry executives are talking about asking Congress to make the hybrid plans available to larger companies.