401(K) Companions May Widen Retirement Safety Net

The financial and emotional scars of the bear market still have many Baby Boomers in limbo, unsure if their savings will last their lifetime.

Keying on those worries, the 401(k) industry has started providing products designed to help transform savings into steady paychecks that will be a safety net throughout retirement.

Called retirement income or guaranteed income solutions, they are add-on or companion pieces to traditional 401(k) plans that shift the focus from building savings to making the savings last throughout retirement.

It's up to employers to offer the plans, then it's up to older workers to decide whether to shift all or a portion of their 401(k) savings into this type of service.

These products are just starting to gain momentum. While 94% of employers say they feel responsible for helping workers prepare for retirement, only 24% have decided to accept one of the new retirement solutions, a BlackRock survey found.

The lifetime income products fall into two general types:

•One is offered by insurance companies and is similar to an annuity, but has more flexibility. Workers can choose to roll some or all of their 401(k) savings into the plan, then get guaranteed monthly income for life after they retire.

But unlike an annuity, they can withdraw or shift a portion of their balance at any time, which would lower the guaranteed monthly payments.

•The other is offered by mutual fund companies and investment advisers and focuses on using bonds and money market funds to help protect savings against big drops in the stock market and maintain steady payouts.

They usually also invest a certain amount in stocks. And some offer an option for an annuity-type product.

Getting a little help

Retirement income strategies can be appealing for middle-class workers because they're less costly than hiring a personal investment adviser, says Alison Borland , retirement outsourcing strategy leader for Aon Hewitt.

Even those who are confident about managing their own investments may want help when they grow older.

"I want something that is close to automatic pilot," says Michael Waggoner , who lives in Boulder, Colo. "I have read that one's financial acuity may decline with age."

Phillips Lytle , a law firm based in Buffalo since 2007, has offered its employees a retirement product from its 401(k) plan provider, Prudential Financial. When plan participants reach age 50, they can sign up for Prudential's IncomeFlex, an annuity-type of product that provides lifetime guaranteed income.

"We thought it was important to offer this product to our employees so they do not outlive their assets," says Brian Eckert , executive director of the firm.

Complicated decisions

Employers and employees typically have been reluctant to rely on annuity-related products, and one reason is that they have many intricacies and are confusing, says Chris Reagan , retirement plan advisory practice leader at Mesirow Financial.

Not all annuity-like products are protected against inflation. And the guarantees associated with the plans are meaningless if the insurance company offering them goes belly up, says Jean Setzfand , director of financial security at AARP.

Anyone who is unsure about annuity-related retirement solutions can invest just a slice of their retirement savings in them.

At Phillips Lytle , Eckert, who is 56, decided to put a portion of his retirement savings in the plan. "I am a strong believer in not having all of my eggs in one basket," he says. "But I like being protected."

With flexibility can come risk

Non-annuity products will not provide the same amount of protection because, as the financial crisis showed, bonds and even some money market funds also carry some risk. But they offer more flexibility and simplicity. And some employers prefer that kind of option.

Baylor Health Care System in Dallas has signed up for Income+, which is offered to 401(k) plans by Financial Engines, an independent investment adviser.

The plan relies on a mix of bond and money market funds to try to create a floor for providing steady monthly payments. Some is also invested in stock funds initially, and the exposure to stocks is scaled back as retirees get older.

Companies usually do not assume any of the cost when they offer the products, so employees must foot the bill, says Aon Hewitt's Borland.

But the plans often have lower fees because the employer is negotiating cheaper rates and spreading the cost over many people, says Scott Holsopple , president of Smart401k, a Web-based investment advisory service.

For example, the total investment and guarantee fees for Prudential IncomeFlex target date funds range from 1.63% to 1.98%. And Financial Engines Income+ typically charges an annual fee of 0.4% of assets to manage the account.

Seeking true costs

Most workers already have learned that 401(k) plans can have hidden fees. The same could be true with some of the new retirement income solutions, so employees need to examine the fees and make sure they're worth the value, says Josh Cohen , defined-contribution practice leader at Russell Investment says. They also should make sure that the advice is unbiased and that the provider has no conflicts of interest, Borland says.

Even if all companies start offering retirement income solutions, that will not fix the biggest problem. "They will not help people who have not saved enough," says Teresa Ghilarducci , professor of economics at the New School for Social Research in New York.

It is the lucky few who have done a good job at stashing away money who will benefit most from the new retirement products.

It may not be a perfect solution, but anything that increases the likelihood that people will not run out of money in retirement is a good thing, says Dallas Salisbury , president of Employee Benefit Research Institute.