A Question of Balance

The much-maligned 401(k) plan is being beefed up. So are the penalties for failing to manage it well.

Some work like variable annuities with guaranteed- minimum-withdrawal benefits: the participant is assured no loss of principal while saving for retirement, and can then take annual withdrawals equal to, say, 5% of their account value at retirement, even if their account balance subsequently falls to zero. Others are essentially deferred annuities that allow participants to purchase future chunks of guaranteed income. To date, these products have attracted limited interest from plan sponsors, but look for that to change as Congress, regulators, and vendors press for better solutions.

“Variable annuities have been quite successful in the individual market, but the ones applied to the retirement market to date have been retrofitted; they weren’t originally designed to fit into a defined-contribution plan like a 401(k),” observes Charlie Nelson, president of plan provider Great-West Retirement Services. “Some say you have to be in the product for five years, or, if your plan sponsor changes providers, you lose your benefits. Or they might say we will refund your money if you leave. Well, I don’t want a refund of my money; I want the guarantee.”

Nelson says the next generation of products, including an offering from Great-West, will be designed to fit inside a defined-contribution plan and will take into account portability at the plan level. They will allow participants to invest in more than one company’s investment option, lock in high points of the particular fund or target-date series in which they have invested, and then draw down that amount over their lifetime. Look for some of these second-generation products to debut this month or early in 2010, Nelson says.

Better Investment Options

In the wake of 2008′s financial-market meltdown, many plan sponsors are reassessing their plan’s investment lineup, beginning with the target-date funds that so many have installed as their default investment option. “It’s the preeminent issue right now,” says David Wray, president of the Profit Sharing/401(k) Council of America (PSCA), a nonprofit employer group. “Companies are definitely interested in seeing if they can do better with their target-date funds. It’s not that they are unhappy with them, but they want to do better.”

Much of the public criticism of target-date funds has focused on the “glide paths” they follow as they reduce their equity exposure over time (see “Are Target Funds on Target?” May). Some funds with a target date of 2010 lost 30% or more of their value in 2008, prompting complaints that they were overly invested in equities for participants nearing retirement age.

But a recent PSCA survey shows plan sponsors themselves are less concerned with glide paths than they are with the quality and cost of their target-date funds’ underlying investments. Where target-date portfolios are invested exclusively in a vendor’s own funds — and especially where those underlying funds are higher-cost, actively managed funds — some sponsors are wondering if they’re getting the best possible investments or simply padding the vendor’s revenue stream.

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