Experts: 401(k) Plan Innovations Need More Income Options, Shift To Simplicity

By Cyril Tuohy
InsuranceNewsNet

Retirement plan experts said that 401(k)s, the main pillars of the nation’s private sector defined contribution system, must offer plan participants more income choices as a way to secure the withdrawal or decumulation phase of a retirement plan.

“People are realizing that the 401(k) has to shift into income within the defined contribution space,” said Mark Foley, vice president of product development and Institutional Investment Solutions with Prudential Retirement.

Foley spoke at a recent marketing summit of the Insured Retirement Institute. He served on a panel exploring innovations in retirement income.

Originally developed as a supplemental tax-advantaged account for executives who had already set aside as much as they could through other employer-sponsored incentives, the 401(k) has become the primary vehicle for retirement plan participants over the past 30 years.

Designed to accumulate assets, 401(k)s are not nearly as well geared to fill needs within the distribution phase of a retirement plan. Some experts have called on converting 401(k)s to annuities as a way to improve retirement readiness.

Anna Dreyer, vice president of the Asset Allocation Group for T. Rowe Price, said new retirement product designs must be simple, offer participants access to liquidity and deliver a “robustness of strategy design.”

She added that the next generation of defined contribution plans need to be built around a systematic withdrawal strategy, and that plan designs need to accommodate the needs of future retirees as opposed to present retirees.

The Pension Protection Act of 2006, which “nudges” workers toward save more through automatic enrollment, has helped workers put aside money for retirement. Data show that the more money workers set aside during the accumulation phase of their retirement plan, “they more likely they are to stay” in it.

Philip Pellegino, executive director and head of annuities for UBS Financial Services, said the simpler the solutions offered by the defined contribution retirement plan industry, the better.

Critics of the 401(k) system say that while the automatic payroll deduction has made it easy and convenient to accumulate retirement assets, investors and plan participants often are faced with too many investment options. This often results in an investment hodge-podge.

Workers and managers have amassed trillions of dollars in 401(k)s since companies began shifting to a defined contribution model and out of defined benefit pensions in the late 1980s.

Investment Company Institute (ICI) data show that at the third quarter of last year, 401(k) plans held $4.5 trillion in assets, and other defined contribution plans held $2.2 trillion. In all, defined contribution plans held 27 percent of all U.S. retirement assets, ICI data show.

 InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.