New 401k Features to Watch For

401k’s have taken a lot of heat recently. The 2008 market meltdown spoiled retirement plans for millions of baby-boomers nearing retirement. Not only did 401k market values tumble an estimated $2 trillion, but scores of companies stopped matching employee contributions altogether. Time Magazine’s October 8, 2009 cover story even declared that it was “time to retire the 401(k)”.

But rumors of the 401k’s demise are premature. Despite many shortcomings, 401k’s will almost certainly remain the primary retirement program for US workers for decades to come. Cost-conscious companies are not about to get back into the defined benefit pension business. The federal government is in no position to take on retirement funding responsibilities beyond social security and medicare. And state and local governments, buckling under the weight of their own overly-rich DB pensions, may be the next big growth area for 401k-type retirement programs.

So if 401k’s aren’t going away, it makes sense to see what the next generation of 401k’s might look like. Here’s a brief look at some new 401k features to watch out for:

1. Auto-401k – Continued emphasis on automatically enrolling employees in company 401k’s and automatically defaulting employees into pre-selected investment funds. This movement is well underway and is strongly endorsed in federal legislation and supported by powerful interests like AARP. More focus will be placed on auto-enrolling all employees, not just new hires.
2. Auto-Contribution Escalation – More 401k programs will automatically step-up employee 401k contribution rates (e.g. 1% per year) until maximum threshold (e.g. 10% of pay) is reached. As with auto-enrollment, increases would occur by default and need to be specifically overridden by the employee.
3. Investment Options – Look for: 1) movement away from actively managed funds to lower-cost index funds, 2) greater use of “managed accounts” where an investment adviser places participants into a pre-mixed portfolio of funds based on factors like age, expected date of retirement, and risk tolerance, 3) more focus on maintaining low investment management and transaction fees and, 4) automatic re-balancing of investment portfolios.
4. Personalized Financial Advice – Online tools as well as face-to-face financial advice will cover broader spectrum of personal finance issues not limited to 401k investments.
5. Reporting & Disclosure – Pending legislation would require plan sponsors to provide clear and understandable fee disclosures on 401k investment options. Another recent piece of legislation would require sponsors to inform participating workers of the projected monthly income they could expect at retirement based on their current 401k account balance. The buzzword these days is transparency and 401k’s will include more reporting and disclosure to try and ensure that participants are fully informed about their retirement program.
6. More and Better Annuities – Unlike traditional pensions that pay a monthly benefit for life, 401k’s benefits last only until the account balance is depleted. Indeed, one of the shortcomings of 401k’s is that far too many participants take money out in a lump sum instead of planning for a steady benefit distribution. Look for a variety of annuity-based 401k withdrawal options in the future.
7. Retention of Participants Post-Retirement – Upon reaching retirement age, the norm has been for participants to take a lump-sum withdrawal from their 401k and roll it over to an IRA. Plan sponsors are realizing that this detracts from the plans asset base, increasing fees and lowering buying power. Participants are realizing IRA investments have higher fees and lack the fiduciary oversight and advice tools available in an employer’s 401k. Look for greater emphasis on retaining 401k participants into retirement.