Employers Expand Choices for 401(k) Plans

Many employers are expanding the range of choices in their 401(k) plans to address employees’ growing concerns about having enough money in retirement.

The 401(k) is under increasing pressure to perform as the plans assume a dominant role in the way Americans save and pay for retirement. The plans became a primary retirement-savings tool as companies moved away from traditional pension plans, which provide a set income for life, to 401(k)s, which are funded by workers’ contributions and optional employee matches.

The shift to 401(k)s places a greater burden on employees, who must decide whether to put part of each paycheck into the plan and how much to contribute. Employees are also responsible for deciding how the funds will be invested and for managing the assets when they retire. Employees can begin withdrawing the funds at age 59 ½ , but they can also choose to keep the funds in the 401(k) ,where they continue to grow tax free, or roll them over into another tax-sheltered retirement product, an IRA.

To better meet the needs of employees, who likely feel overwhelmed by the challenges of investing and managing their retirement assets, many companies are redesigning their 401(k) plans to offer an expanded range of choices. This is true for 69 percent of employers offering mid-sized plans with $10 million to $200 million.

Bond funds and target date funds are two options most frequently added to mid-sized 401(k) plans in 2011, according to a new MillionaireCorner study on the retirement plan industry. More than 20 percent of these plans also offer the option to invest in annuities, an insurance product that guarantees a set income for a set period of time. Among other things, the increased range of choices attempts to meet employees’ desires for more conservative investment options.

Target date funds are designed to help investors save for a designated retirement date. Fund managers reinvest assets over time and the funds slowly shift to a more conservative mix as retirement nears. It’s important for investors to realize that not all funds with the same target date are similar, nor are the funds that coincide with their retirement date necessarily the best ones to meet their needs. Many employees are automatically enrolled in target date funds when they sign up for their company’s 401(k) and they may not even realize how their money is invested. The U.S. Securities and Exchange Commission is considering rules to help investors better evaluate the workings and risks of target dates.

Annuities are increasingly seen as an answer for Main Street Americans who desire a guaranteed income in retirement. The U.S. Government Accountability Office in June released a report recommending that most Americans work longer, delay taking Social Security benefits until at least full retirement age, and buy an annuity to avoid running out of money in retirement.