Here’s How to Save Your 401k From Getting Wiped Out
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May 11, 2013
The recession threw a huge wrench in the American retirement plan.
Defined-benefit pensions have never been as widespread as commonly believed. After hitting a high of 112,000 private-sector pension plans
in the 1980s, that level has now dropped close to 30,000. In
particular, government action has served to decrease the number of
pension plans. In an effort to protect workers in the event that their
employers fail and their pensions are lost, the federal government has
forced companies to do a better job funding pension plans. In 2006,
Congress passed the Pension Protection Act, which encouraged employers to enroll workers automatically in 401ks.
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When the financial crisis hit, and the stock market tanked,
the financial security of tens of millions of people was jeopardized.
It has been estimated that trillions of dollars
evaporated from those accounts as a result. Major U.S. equity indexes
dropped sharply in 2008 — the S&P 500 alone fell 37 percent that
year — and those losses translated to “defined contribution” plans,
whose payouts are dependent on contributions and investment returns,
like 401Ks.
With those losses and the current low interest rates, its a
real risk that many Americans will run out of money in retirement.
According to the Jack VanDerhei, the research director of the Employee
Benefits Research Institute, approximately a quarter of baby boomers and
Generation Xers, who should have had adequate retirement income under
historical average returns, will run short of money in retirement if
today’s low rates become a permanent fixture of the financial reality.
But at the EBRI’s policy forum in Washington D.C. on Thursday, titled “Decisions, Decisions: Choices That Affect Retirement Income Adequacy,” several solutions were suggested.
Retirement accounts, like the 401k could diversify beyond a
United States-centric aggregate bond index. Stacy Schaus, head of
PIMCO’s defined contribution practice, said that most 401k plans have
one core bond fund primarily of lower yielding government-related debt.
“We believe people need to get out of the aggregate, to diversify, to
get the yield they need,” she said, according to Forbes.
Stable value funds, which invest in short to medium term
bonds with an insurance wrapper, can also become a safe place for many
401k plan participants. Returns stand at approximately 2 percent, a rate
of return higher than similar options without proportionally greater
risk. “A lot of people really crave predictability,” said Michael Davis,
formerly of the Department of Labor’s Employee Benefits Security
Administration. “It’s an important asset class that a portion of our
country needs as they age.”
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There are even simpler solutions. Dan Campbell, leader for
Aon Hewitt’s defined contribution practice, and Jeanne Thompson, vice
president of Fidelity Investments, believe that employers should revise
match formulas so that between 50 percent and 60 percent of employee
salary deferrals are matched. As it stands, 28.7 percent of all
employees with 401k plans do not save enough to get their free employer
matching contribution, but an update of the formula could help drive
“deferral rates by encouraging participants to take full advantage of
the match,” Thompson said. Furthermore, many employers set the default
401k contribution level at a mere 3 percent of pay, even though a 15
percent savings rate is much more optimal.
Panelists at the forum also noted that employers should
embrace annuities as a 401k option. “Annuitization is the only means to
guarantee a consistent income stream that an individual cannot outlive,”
said Paul Yakoboski, a senior economist with TIAA-CREF, according to Forbes.
The annuities choice has been built into TIAA-CREF retirement plans for
quite awhile, and about 50 percent of all TIAA-CREF participants chose
the guaranteed deferred annuity as an investment option.
You can follow Meghan on Twitter (@MFoley_WSCS) for the latest industry news.
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