Will 401k's become American retirees' savings plan of choice? Here's how they're evolving to fit the times.
People retiring in 20 or more years are going to be the first recent generation to retire relying mostly on their own savings from 401ks and the like.
Whether this approach is good enough to provide a comfortable retirement for most people remains to be seen, but Jeanne Thompson, a vice president at Fidelity Investments, the nation's largest provider of these retirement savings plans, is optimistic. She says, "The Pension Protection Act of 2006 was a sweeping reform that put in place guardrails to strengthen 401ks. All of the nuts and bolts are there to give 401ks the durability to become the primary savings vehicle."
The system is still evolving. Thompson points to these retirement planning industry trends that aim to further strengthen 401ks:
More Roth 401ks. About twice as many plans compared with 2009 -- about 42 percent -- have added Roth options. These allow participants to pay taxes on the money as it goes in rather than when it comes out. Thompson says they are especially attractive for younger workers who are in the early years of their careers and not making big salaries or facing big tax liabilities. Paying taxes at this point allows workers to build a bigger, more secure retirement savings base and manage the risk of higher future tax rates.
Greater availability of self-directed brokerage options. More employers -- about 40 percent -- are giving workers who are experienced investors the option of using the broad array of stocks, bonds and mutual funds available outside of their 401k plan lineups. Thompson says this option is particularly attractive to older investors with more money to manage.
More employees enrolled automatically. At companies with 401k auto enrollment, on average 84 percent of workers participate compared with slightly more than 50 percent when enrollment isn't automatic. "Inertia takes over," Thompson says.
Ways to compare plan features. More employers are demanding industry-specific benchmarking information from their 401k providers and some of them are sharing that info with their employee participants. If you're not getting this information, ask your human resources department because it may be available.
More high-deductible health plans with health savings accounts, or HSAs. Thompson says more employers are offering this option to hold down insurance costs, and it's particularly attractive to younger, healthier workers, as well as older workers saving to cover health care costs in retirement. "Many people are over insured," Thompson says. "They pay $300 to $400 a month for insurance, but they only go to the doctor once a year. If they choose a high-deductible plan, they pay less per month and they can put the difference in an HSA where there is triple tax savings -- money goes in tax free; it earns tax-fee interest, and it goes out tax-free."
More savers choosing target-date funds. Many employers are making target-date funds the default option, and 33 percent of workers are either going with the flow or deliberately choosing this option. A smaller percentage of employees have a personally managed option, which provides a very specific array of investments based on information the worker provides about his personal financial situation. On average, workers who use the managed option pay an additional 50 basis points (half a percent) in annual fees.
More focus on the bottom line. Increasingly employers are making available tools that help workers translate savings into projected monthly income streams in retirement. If your employer isn't, then ask. This is an inexpensive benefit that can make your retirement planning much more effective.
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