A critical missing piece in 401(k) plans
“Workers relying in large part on their 401(k) plan in retirement may not always have a feasible way to make their savings last throughout retirement.” That’s the opening line of an insightful report recently released by the U.S. Government Accountability Office (GAO). It follows on the heels of another recent report prepared by the Bipartisan Policy Center that reached similar conclusions.
The GAO study included a survey of 11 administrators of 401(k) plans covering 40 percent of all 401(k) assets at the end of 2014. About two-thirds of the plans didn’t offer payout options that are intended to last a lifetime, and about three-fourths didn’t offer annuities in which an insurance company guarantees a lifetime payout.
The GAO explores various risks older workers face when deciding how to deploy their retirement savings:
- Poor investment returns just prior to or just after retirement, known as “sequence of returns” risk, can have a serious impact on older workers or retirees who have less time to make up for lost savings, either by increasing contributions or working longer.
- Participants who want to use a portion of their savings to buy an annuity face the risk that interest rates will be low at the time they retire, thereby reducing their retirement income.
- Later in retirement, some retirees may experience cognitive decline that affects their ability to manage their savings, leaving them open to be targeted by fraudsters.
- Many retirees face longevity risk -- the chance that they’ll outlive their savings. The longer a retiree lives, the greater the exposure to a range of risks such as stock market crashes and inflation eroding the value of their savings.
These are indeed daunting challenges, and it should be no surprise that older workers would appreciate help to address them. Recent studies conducted by the Stanford Center on Longevity (SCL) and the Society of Actuaries (SOA) show how employer-sponsored 401(k) plans and their advisers and administrators can use their resources to construct a menu of diversified retirement income options. Such a menu would complement their investment lineup and could include systematic withdrawal plans using the plan’s investment funds, an annuity bidding platform or payout options to help optimize Social Security payments.
One important conclusion from the SCL/SOA studies is that 401(k) plan sponsors have the potential to increase their participants’ retirement incomes by 5 percent to 20 percent by offering retirement income programs with institutional pricing instead of the standard retail pricing individuals might have to pay on their own.
In a prior study, the GAO reported that six countries had developed innovative approaches and strategies to help mitigate the financial risks their older workers face in securing adequate retirement income, illustrating that it’s possible to address the risks described above. The countries are Australia, Canada, Chile, Singapore, Switzerland and the U.K.
The GAO study also identified one significant barrier to widespread adoption of retirement income options by employers: their vulnerability to lawsuits by participants who might experience unfavorable outcomes from their choices or who are otherwise disappointed with their options.
The GAO included seven recommendations to the U.S. Department of Labor (DOL) that would offer employers limited liability relief. And according to the GAO, DOL generally agrees with the GAO’s observations and describes the actions it would take to address the intent of the GAO’s recommendations. So it’s possible that help is on the way.
Employer-sponsored 401(k) plans are in a unique position to help older workers convert their hard-earned retirement savings into reliable income without any incentive that might influence their participants’ decision-making. This objectivity will help older workers feel more confident about their retirement.
Retirement income options might become more widespread if older workers create the demand with their employers. If you’d like help creating retirement income from your 401(k), share this story with your employer and diplomatically ask to explore a program of retirement income. If enough co-workers make the same request, you might make it happen. And it could become an important part of your retirement planning.