Automatic enrollment generally is considered to be a successful tactic for countering employee inertia. Many employees - especially younger and low-moderate income workers - who in the past tended not to bother signing up are now being enrolled in the company 401k plan by default.

Now government agencies now are testing the waters to see if the inclusion by default concept should be considered for employees starting their retirement. The concern here is that, having accumulated a 401k nest egg during their working years, new retirees often tend to withdraw their 401k assets in a lump sum and may not fully understand the importance of making the money last throughout retirement.

In response, policymakers are seeking input on the notion of "automatically annuitizing" 401k balances at retirement to provide a lifetime income stream. Under this concept, all or part of a workers 401k balance at retirement could be turned into an annuity that pays a monthly benefit for life.

A recent request for information (RFI) put out by the Department of Labor seeks input from the public and industry experts on numerous questions about 401k "lifetime income options". Several of the questions included in the RFI reveal there is a significant interest in the auto-annuity idea:

"11. Various "behavioral" strategies for encouraging greater use of lifetime income have been implemented or suggested based on evidence or assumptions concerning common participant behavior patterns and motivations. These strategies have included the use of default or automatic arrangements (similar to automatic enrollment in 401(k) plans) and a focus on other ways in which choices are structured or presented to participants, including efforts to mitigate "all or nothing" choices by offering lifetime income on a partial, gradual, or trial basis and exploring different ways to explain its advantages and disadvantages. To what extent are these or other behavioral strategies being used or viewed as promising means of encouraging more lifetime income? Can or should the 401(k) rules, other plan qualification rules, or ERISA rules be modified, or their application clarified, to facilitate the use of behavioral strategies in this context?

12. How should participants determine what portion (if any) of their account balance to annuitize? Should that portion be based on basic or necessary expenses in retirement?

13. Should some form of lifetime income distribution option be required for defined contribution plans (in addition to money purchase pension plans)? If so, should that option be the default distribution option, and should it apply to the entire account balance? To what extent would such a requirement encourage or discourage plan sponsorship?"¹

Clearly, government policymakers recognize that the move away from traditional defined benefit (DB) pensions that provide monthly pension benefits for life is permanent and won't be reversed. Their challenge now is to find ways to tweak and strengthen the 401k system so that it becomes a viable means of providing long-term retirement security to American workers.

There are numerous practical challenges in the way of auto-annuitizing including the big problem of inadequate average 401k account balances. Still, the concept seems to be gaining momentum and is likely to be seriously considered and debated in the coming months.

The complete lifetime income options RFI can be found on the Department of Labor's website. The questions asked in the RFI provide insights into the direction that 401k planning policy may be headed in the Obama administration. You can also publicly comment on the RFI at Regulations.gov. ²

1. US Department of Labor Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans - 2/2/2010
2. Search for "RIN 1210-AB33" to bring up current comments on the proposal as well as links to submit your comments.

Click image to view full study

A new study from the Center for Retirement Research at Boston College delves into the determinants of why companies suspend matches. Their main findings are not particularly surprising: Companies most likely to have suspended 401k matches in 2009 tended to be:

1. Larger Companies
2. In the manufacturing sector
3. Exhibiting liquidity constraints

Somewhat surprisingly, neither a company's profitability nor the presence of a defined benefit pension program were significant factors in explaining match suspensions.

The study concludes:

The recent financial crisis and ensuing recession has once again sorely strained 401(k) participants. As in 2000, employees have been reminded that they are on the hook for financial risk. At the same time, it is once again clear that the employer match, a valued component of 401(k) plans, is neither mandatory nor permanent. About 5 percent of active participants in 401(k) plans have seen their employer’s match suspended. The key cause of this phenomenon is likely a lack of liquidity on the part of employers, which renders them unable to continue their previous contributions. As the crisis abates, companies appear to be restoring the match. If this trend continues, the suspensions may have done little harm and may have been better than the alternative of cutting payroll or laying off workers.

The CRR study was done at a macro-level by a correlating of company data submitted on federal form 5500 filings with financial data fro Standard & Poors. The study did not delve into the actual decision-making that leads firms to determine that they will suspend their match. For example, it would be interesting to examine whether cutting the 401k match is a first resort or a last resort in the menu of cash preservation techniques that liquidity constrained firms choose from.

Our fear is that 401k matches are becoming the cash preservation tool of choice because they can be implemented relatively easily, swiftly and have a big and immediate impact (2% - 4% of payroll). If this is the case, it does not bode well for workers who can expect to weather 3-5 recessionary period over a 40 year working career.

The Senators' Lifetime Income Disclosure Act (S. 2832) would require 401(k) plan sponsors to inform participating workers of the projected monthly income they could expect at retirement based on their current account balance. The measure is patterned on the Social Security Administration's annual statements, which are mailed annually to working Americans to inform them of estimated monthly benefits based on their current earnings. Congress mandated annual Social Security statements in 1989, and they have proven to be very useful to workers in preparing for retirement.

By providing similar information for 401(k) plans, the Lifetime Income Disclosure Act would give American workers a more complete snapshot of their projected income in retirement.

Specifically, under the Act, defined contribution plans subject to ERISA – including 401(k) plans – would be required annually to inform participants of how the account balance would translate into guaranteed monthly payments – a "retirement paycheck for life" – based on age at retirement and other factors.

To ensure there is no material burden or potential liability on employers who voluntarily sponsor 401 (k) plans, the legislation directs the Department of Labor issue tables that employers may use in calculating an annuity equivalent, as well as a model disclosure. Employers and service providers using the model disclosure and following the prescribed assumptions and DOL rules would be insulated from liability.

As far as Congressional bills go, the Lifetime Income Disclosure Act is relatively simple and straightforward - only six wide-margin, double-spaced pages in length. The heart of the bill is comprised of three sections setting forth the type of lifetime income disclosures to be made:

1. DISCLOSURE — A lifetime income disclosure shall set forth the annuity equivalent of the total benefits accrued with respect to the participant or beneficiary.



2. ANNUITY EQUIVALENT OF THE TOTAL BENEFITS ACCRUED — For purposes of this subparagraph, the ‘annuity equivalent of the total benefits accrued’ means the amount of monthly payments the participant or beneficiary would receive at the plan’s normal retirement age if the total accrued benefits of such participant or beneficiary were used on the date of the lifetime income disclosure to purchase the life annuities described in subclause (III), with payments under such annuities commencing at the plan’s normal retirement age.
3. LIFE ANNUITIES.—The life annuities described in this subclause are a qualified joint and survivor annuity (as defined in section 205(d)), based on assumptions specified in rules prescribed by the Secretary, including the assumption that the participant or beneficiary has a spouse of equal age, and a single life annuity. Such annuities may have a term certain or other features to the extent permitted under rules prescribed by the Secretary.

Details concerning the assumptions to be used and implementation rules are left for the Labor Department to determine.

With the transition from defined benefit pensions to 401k's, Americans have been forced to assume greater responsibility for their own retirement funding. Too many are ill-prepared for the task. If the defined contribution retirement model is to succeed, it is critical that workers be better educated on retirement issues and provided good information on which they can base their savings decisions. Senate Bill 2832 appears to provide a low-cost, common-sense way to greatly improve 401k planning.

401k Cuts have slowed dramatically in recent months

But as the recession eases, there are strong indications of a slowdown in 401k cuts. The Pension Rights Center maintains an unofficial list of employers that have changed or suspended 401k matches. A plot of the announcements listed on their website shows a sharp fall off from levels of early 2009.

In the same vein, two recent studies (By Fidelity and Watson Wyatt) note that many companies that reduced or suspended matches now indicate they plan to reinstate them in coming months:

According to Fidelity:

Fidelity also said companies which lowered or suspended their 401(k) match in the past year are starting to reinstate the match.

The company said a survey of plan sponsors shows 27 percent of employers said they had already reinstated the match or plan to reinstate it within the next 12 months. The trend is particularly true with larger plans of 5,000 participants or more, with 44 percent of those employers indicating they have either already reinstated or plan to reinstate their match over the next year.
According to Wyatt:

In the next six months, 35% of firms that snipped away at their matching programs are planning to bulk them up again, according to a recent Watson Wyatt survey. That’s up from 24% two months ago.

The return of the 401k match is, of course, great news. Matches are easily the best incentive for employees to make (or increase) their own contributions. When employers cut matches, worker contributions invariably fall off. Hopefully, the damage done by the recent round of 401k cuts can be quickly undone.

Benefit Plan Limits (2003 - 2010)

There are several "limits" that apply to 401k plans under the Internal Revenue Code (IRC). The limits are found in various sections of the IRC. 401k plans must comply with the various IRC limits to maintain tax-qualified status. The Internal Revenue Service (IRS) annually increases 401k plan limits to reflect changes in the Consumer Price Index (CPI). Often, adjustments are made only if the change in the limit attributable to the CPI exceeds a certain threshold (e.g., $1,000 or $5,000).

The table below shows the primary 401k plan limits in effect for 2010 and 2009. Brief descriptions of the various limits are also provided.

Here are nine ways that savvy credit card users can bolster savings:

1. Cash Rewards - There are several no-fee credit card that pays at least 2% cash on all purchases.
   

   Fidelity 2% Retirement Rewards Card

   Using these cards wisely for purchases like groceries, utilities and other routine items can generate significant savings. I like the Fidelity 529 Rewards Card since my immediate savings goal is college tuition for my children. But Fidelity also has a 2% card that pays rewards into a retirement account. Charles Schwab has a similar 2% card that pays into a brokerage account.
2. Pay at the Pump - I use a second credit card strictly for gasoline purchases since it pays 5% rewards for gas paid for at the pump.
   

   PFCU 5% Gas Card

   The card I use here is the Pentagon Federal Visa Platinum Rewards Card which pays 5% on gasoline purchases made at any gas station. Besides the 5% rewards, I find that the habit of paying at the pump also adds to savings by helping me avoid the impulse purchase tempatations found in gas station convenience stores.

 

3. Returns - Paying with a credit card allows you to return merchandise without a receipt. I recently found myself in a situation where I needed to return some things but could not find the receipt. Because I knew the credit card I had used, a full refund was credited to my account. Stores now cross-reference credit card purchases with UPC codes making receiptless returns possible. Credit cards make it easier than ever to return unwanted items and tap an often overlooked source of savings.
4. Float - With credit cards, you make cash outlay for your purchases on (or before) the due date of the card statement - i.e. several days or weeks after the purchase is made. This float time allows you to keep your money in an interest earning account longer than if you paid with cash, check or debit card. Over time, earnings on the "float" adds up and is significant.
5. Fraud and Theft Protection - Credit cards offer far more protection against fraud and theft than other payment forms. With cash, checks and debit cards, if an unauthorized party is able to access your funds, you have very little recourse. Credit companies, spurred by federal and state regulations, have broad coverage against fraudulent use. Here's what MasterCard's policy says:
   

   With MasterCard's Zero Liability policy, you're protected from fraudulent uses on your account. You pay only for purchases that you have authorized on your MasterCard card. As long as your account is in good standing, you have exercised reasonable care in safeguarding your card, and you have not reported two or more unauthorized events in the past twelve months, unauthorized purchases are not your responsibility.

   Additionally, credit card companies are very proactive in combatting fraud since it is a major problem for them. On several occassions I have received phone calls from my card company inquiring about transactions that had triggered suspicion in their fraud prevetion unit.

6. Buyer Protections - Buying with a credit card can give you more leverage than other payment forms in the event you have a billing dispute with a seller. If you pay up front for something (mail order, for example) with a check or debit card and the goods are never delivered, it's pretty much up to you to do the work to get your money back. With a credit card, you will have to complete some paperwork to file a dispute, but you will find that the credit card company may be far more effective in getting the retailer's attention (and a response) than you are on your own. Also, many credit cards provide extended warranty coverage on products. Typically these programs double the product manufacturer's warranty period up to one year.
7. Identify and Control Cash Leakage - I use my credit card for even the smallest incidental purchases (e.g. a soda or pack of gum). Why? For one, I like to get rewards whenever possible. But even more important, using the credit card gives me a free, no-hassle way to track and account for these purchases. The cumulative leakage caused by small cash purchases can easily become a budget buster. Getting a neat, printed summary of these purchases each month helps identify problem areas, modify spending behavior and save even more.
8. Ability to Grab Great Opportunities - Great sales and great deals don't always coincide with payday. Savvy use of a credit card gives you added flexibility to take advantage of a great deal even if you don't have funds at your ready disposal. Of course you still need have funds to pay the credit card bill when due.
9. Free Insurance - When you rent a car you'll be "encouraged" by the rental agent to purchase insurance through the rental company. One survey says that 34% of renters buy the additional insurance just to make sure they're covered. Many credit cards provide coverage (usually secondary to your main auto coverage) that may make it unecessary to purchase insurance trhought the car rental agency. Many credit cards also provide many forms of travel insurance such as travel interruption and lost baggage coverage.

Of course, if you don't pay your credit card balance in full each month, all of the savings benefits listed above will be more than wiped out by finance charges you'll pay. And keep in mind that not all credit cards offer equal services and benefits. There are many differences between cards and you always need to read and understand the detailed terms and conditions to be sure the credit card you're getting has the features you value most.

• Five ways to argue Less About Money - Brief but useful tips to help you naviagate the number one source of marital discord: money issues.
• Net Present Value: Why You Should Use it in Everyday Life - A good layman's explanation of the power of using NPV to compare loans and other everday cashflow issues.

The Carnival of Personal Finance is a great way to see what's current in the personal finance blogoshere. These are articles you likely wouldn't come across with a Google search since they're too fresh to rank highly. Nonethless, there is some great information here and we recommend a visit.

Fidelity Retirement Rewards Credit Card

Not to be outdone, we hear today that Fidelity has unleashed a competing 2% reward card: Fidelity Retirement Rewards Card. Like the Schwab card, there is no annual fee for the Fidelity Retirement Rewards Card nor are there caps or limits on the amount of rewards that can be earned:

Using the new Fidelity Retirement Rewards Card, investors earn two points for each dollar spent on purchases. Once a Cardmember reaches a minimum of 5,000 points, or $2,500 in purchases, points can be automatically swept as a $50 current year contribution into the user's designated Fidelity IRA. If the Cardmember has maxed out their IRA contribution for that year(6), they can continue to accrue points and restart automatic deposits to their IRA the next year. Investors also have the flexibility, at any time, to automatically redeem their rewards as cash into other Fidelity accounts or accumulate rewards and redeem them for travel, merchandise and other rewards.

This new breed of retirement credit cards promise to be a great way for many retirement savers to enhnace their savings. Unfortunately, the cards also may be wind up being detrimental to many others. The key to using reward credit cards succesfully is to always maintain control and be able to pay the card balance in full each month.

Buying things with a credit card to earn 2% retirement rewards is senseless if you have to pay 14.99% intereste on outstanding credit card balances.

A Credit Card That Could Help Your Retirement Savings

If you can do this, you can pocket some decent money in the form of cash rebates, airline miles or other rewards. I've always been partial to the Fidelity 529 Credit Card that pays me a 2% rebate on all purchases made (I have an older version of the card that is grandfathered at 2%; newer versions pay a still respectable 1.50%). Over the last 5 years, I've been able to earn more than $4,000 from this card - money paid into a 529 college savings account.

But now Charles Schwab has announced the Schwab Bank Invest First Visa Credit Card, a card that may entice me to shift from funding college costs with my credit card rewards to funding retirement. Here's the lowdown on the Schwab card:

Now there’s an easier way to put investing first: The Schwab Bank Invest First™ Visa Signature® credit card. It gives you unlimited 2% cash back on purchases, automatically deposited into a Schwab One brokerage account each month.

No cash back limits. No minimums. No annual fee.

* There’s no limit on the cash back you can earn.
* No minimum monthly purchase amount.
* And no annual fee or foreign exchange transaction fees.1
* Get a competitive variable Annual Percentage Rate (APR) on purchases, currently 14.99%.1

Again, not a credit card for anyone who carries a balance - 14.99% interest is pretty steep.

But if you're a savvy user who pays the balance in full each month, this could be a great tool to supplement other retirement savings. to find out more, follow the link above.