Too many choices may be as unwise as too few. “People in a 401(k) plan are in an Olympic-size pool with clearly marked lanes; putting them into an IRA is like taking them in a helicopter, dropping them into the Pacific, and saying ‘Good luck, find your way home,’” says Eric Levy, head of the Mercer Securities division of MMC Securities Corp. Several studies posit that the more investment options you give employees — à la IRAs — the less likely they are to save. In a 2003 study of employee-participation rates in 401(k) plans by Columbia University researchers Sheena Iyengar and Wei Jiang, participation rates in 401(k) plans fell 1.5 to 2 percent for every 10 funds added to the plans.
It also may not be a good idea for companies to advise retiring employees to cycle their 401(k) funds into IRAs. “Some plan sponsors are concerned that an IRA rollover may be construed by employees and retirees as an implicit endorsement of a particular investment vehicle, thereby creating a liability if the IRA loses money,” explains Ray Martin, president of CitiStreet Advisors, the registered investment advisory and recordkeeping entity within CitiStreet LLC.
By comparison, the Greatest Generation (a.k.a. parents of the boomers) had it easy: guaranteed pensions via defined benefits provided by employers, plus Social Security. Checks arrived in the mail every couple of weeks, providing a steady cash flow not dissimilar to the biweekly paycheck. When 401(k) plans debuted nearly 30 years ago, they were icing on the cake. Today, they’re pretty much the cake.
No longer can many retirees rest easy knowing their future incomes are secure. Instead, they have to give their retirement assets deep thought, which is not something everyone does well.
According to a 2005 survey by the Employee Benefit Research Institute, more than half of employees (55 percent) describe themselves as being “behind schedule” when it comes to planning and saving for retirement, with 32 percent saying they are “a lot behind schedule.” That’s scary, considering that another 69 million will retire by 2025, according to Tom Modestino, senior analyst at Cerulli Associates in Boston.
Hence the new thinking about keeping assets in 401(k)s. “Moving plan participants from an institutional environment — where they are protected under the [Employee Retirement Income Security Act] and can leverage the sponsor’s buying
power and lower fee structures — into a retail environment, where they are left naked and have all kinds of choices and costs, is being questioned,” says Modestino.
But I’ve Got Four 401(k)s
In essence, about-to-retire workers can choose to: (1) keep invested assets in their 401(k)s, (2) consolidate these assets into an IRA, (3) cash out, or (4) all of the above. Each has its advantages and drawbacks, which is why employee-investment education like IBM’s is emerging as a vital employee benefit. Big Blue teamed with Fidelity Investments and The Ayco Co., part of Goldman Sachs, to develop MoneySmart.
Of course, for sophisticated finance people like CFO Bill Ferko, managing several 401(k) plans in retirement is not difficult. “I’ve accumulated three 401(k) plans over my career,” says Ferko, CFO of Genlyte Group, a Louisville-based manufacturer of lighting fixtures with $1.6 billion in annual revenues. “I expect to leave these assets in the plans and not roll them over.”
Genlyte wants to help its employees in much the same way Ferko helped his father with retirement choices. “We publish newsletters and regularly communicate about their retirement investments. We’ve also introduced an online system [that enables] people to check their balances hourly,” says Ferko.
MassMutual is assisting its own and others’ employees in a slightly different way, by reinstating the bimonthly check in the mail. The concept, called retirement management accounts, is currently in a pilot stage. It endeavors to assist employees in determining how much income retirees need each month, then draws from their retirement assets to provide those funds. As people’s lives change, they can increase or reduce this cash spigot, pulling out more, say, for assisted-living needs or the grandkids’ college tuition.
Spruced-up 401(k) plans add some competition to the retirement-investment game, which is good for baby boomers, Gen Xers, and their heirs. To paraphrase the Beatles, “It’s a long and winding road.” The key is to not get lost, financially, along the way.
Russ Banham is a contributing editor of CFO.