Medical Associates, an 80-year-old multispecialty clinic, found a solution in IncomeFlex, which it introduced last year. Sold by Prudential Financial, the annuity not only provides a steady income for life, it guarantees that the notional value of an employee’s 401(k) assets — or as much as they invest — will not be reduced by market performance. When a participant retires, he is guaranteed a steady lifetime annual withdrawal based on the highest of three values: the market value, the highest value of the assets on the person’s previous birthdays, or the 5 percent income growth value. In return, the insurer will guarantee a 5 percent minimum withdrawal, starting at 65, for the rest of the retiree’s life.
The plan was introduced to the 400 Medical Associates employees past the age of 50. And of the 53 who initially signed on, says CFO Jeff Gonner, most said “they’d rather have Prudential be in charge of their investments than themselves.” The employees didn’t go into the plan half-heartedly, either. “While they could have put a conservative percentage in the Income-Flex option, they put in 96 percent on average,” the CFO notes.
Despite the improvements, annuities aren’t without both downside and risk. The downside to annuities is their cost. Employees pay an annual premium, 95 basis points in this case — or nearly one percent of assets — to Prudential to manage their money. Risks include the possibility of inflation topping 4 or 5 percent or, says Joseph S. Adams, a partner at McDermott Will & Emery, “if the provider goes under.” In that case, there are state insurer guaranty funds to pick up the payments. “However, there is always the risk the guaranty funds may not be able to provide 100 cents on the dollar if numerous insurers file for bankruptcy at the same time.”
Whether any additional pension or 401(k) relief will be introduced by the next President remains to be seen. But the easing of certain regulations has allowed soon-to-be retirees to pad their savings. In 2001, for example, the Internal Revenue Service amended its rules to permit people 50 years and older to squirrel away more in their defined-contribution plans. For traditional safe-harbor 401(k) plans, participants can now save an additional $5,000. For simple 401(k)s, an extra $2,500 is permitted. “It’s great because as you get closer to retirement you can contribute more on a tax-deferred basis,” says Hess. “Our research indicates that 90 percent of employers now offer catch-up strategies.”
The Boeing Co. is one. “We encourage employees age 50 or older to take advantage of catch-up contributions to accumulate more dollars on a tax-deferred basis,” says Pam French, director of benefits and integration. Such plans, adds Alan Glickstein, senior retirement consultant at Watson Wyatt Worldwide, are especially helpful for “second-wage earners, where you can defer relatively large amounts of pay and take advantage of the tax benefit.”
New regulations regarding automatic enrollment also help cushion savings. The IRS now permits employers to automatically enroll employees in defined-contribution plans, provided employees are notified in advance and permitted to opt out. Companies can even enroll existing employees in a target-date retirement account. “While it costs companies more to automatically enroll because their matching contributions go up,” says Hess, “from an altruistic standpoint they’re helping the workforce have the means to retire.” Still, there are some indications that the savings rates of aggressive investors could be adversely affected, since the default rate may be less than their previous savings rate.