Retirement Savings Ideas: Annuities; Auto-Enrollment; 401(k) Plan Loans
May 23, 2011 by Allison Bell
- By ALLISON BELL
Insurers, the Employee Benefit Research Institute and two U.S. senators – Herb Kohl, D-Wis., and Mike Enzi, R-Wyo. – have been talking about ideas for increasing U.S. workers’ retirement savings rate.A center affiliated with Bankers Life and Casualty Company, Chicago, 73% of middle-income baby boomers are rethinking their expected retirement date because of the recent economic slump, and that 79% of those boomers fear they may have to delay their retirement by an average of 5 years.
The center, which based those figures on an analysis of 500 U.S. residents ages 47 to 65 with incomes annual between $25,000 and $75,000, found that 14% of the survey participants believe they will never be able to retire at all.
Only 45% have $100,000 or more in retirement savings, and 71% worry about outliving their money once they retire.
The Bankers Life figures came out during a week when a number of another retirement savings reports and proposals appeared.
Automatic 401(k) Plan Enrollment
Relatively new federal laws and regulations now encourage employers to enroll workers in 401(k) plans automatically as soon as the workers become eligible to participate and require workers who do not wish to participate to take active steps to opt out.
Analysts at Principal Financial Group Inc., Des Moines, Iowa (NYSE:PFG), say they have found ways to design auto enrollment features in ways that improve participant savings behavior.
At plans administered by Principal, having workers who enroll in a plan automatically put 6% of income in the plan leads to an average deferral rate of 7.1%, the analysts say.
At plans where the default deferral rate is 3%, the average deferral rate is just 6.3%, the analysts say.
Most participants automatically enrolled in their plan sponsor’s retirement plans either accepted the default rate or chose to defer more income, the analysts found.
The opt-out rate at plans with a 6% default deferral rate was 19%, which was only moderately higher than the 15% opt-out rate at plans with a 3% default deferral rate, the analysts say.
The Institutional Retirement Income Council (IRIC), Iselin, N.J., a retirement think tank, has published a paper describing a scorecard that can be used to evaluate the suitability of a retirement income strategy as an investment option within an employer-sponsored defined contribution retirement plan.
The authors of the IRIC paper, which is aimed at plan sponsors and their consultants and advisors, uses 5 major criteria that can be used to select and monitor a retirement income strategy:
- Efficacy of the underlying investment process.
- Nature of the lifetime income guarantee.
- Counterparty strength.
- Product cost, including investment management cost and insurance cost.
- Operational flexibility at the plan sponsor level and the participant level.
A scorecard user could rate an income strategy by assigning a rating of 1 to 5 for each criterion, according to the paper authors.
Meanwhile, in related news, Youngkyun Park, a researcher at the Employee Benefit Research Institute (EBRI), Washington, has compared the effectiveness of two products that can provide a guaranteed lifetime income: immediate annuities, which begin generating benefits payments immediately, and longevity annuities, which delay payments until the retiree hits an advanced age, such as 80 or 85.
Either type of annuity can help retirees maintain an adequate income, but being realistic about long term care (LTC) costs can affect the results, Park says.
Park assumes in the analysis that workers will not have LTC insurance and that an annuity will not provided accelerated benefits payments for annuity holders who need nursing home care.
To prepare for catastrophic LTC costs in that situation, an individual should use more than about 80% to 90% of assets to buy an immediate annuity and set the rest aside to cover LTC costs, Park says.
An individual who uses a longevity annuity should split assets between the annuity and investments in the stock market, Park suggests.
Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011 (SEAL Act)
Kohl, chairman of the Senate Special Committee on Aging, has teamed with Enzi, a Republican colleague, to introduce a bill aimed at protecting cash-strapped U.S. workers who take withdrawals or loans from 401(k) plans.
Bill provisions would:
- Ban products that promote asset leakage, such as 401(k) plan debit cards.
- Limit the number loans that a participant can take at one time.
- Let a 401(k) participant who makes a hardship withdrawal to continue to make elective contributions during the following 6 months.
- Give an employee who takes a 401(k) plan loan and then loses a job until the next filing date to pay back the loan, by paying the amount owed into an individual retirement account. Now, departing employees must pay back 401(k) plan loans immediately or else default and incur tax penalties.