February 5, 2010
Extreme Makeover: 401(k) Edition
Investors are about to test drive 401(k) plans with a 21st Century whole new look and feel.
The Department of Labor is promising streamlined rules for 401(k) advice that plan sponsors may actually use. The government is looking into the possibility of offering annuities or other lifetime income options in defined contribution plans.
The case for automatic features becomes stronger every day. Prudential Financial just issued a report showing 84% of workers would like more autopilot features, and Towers Watson released a persuasive report showing that defined benefit plans delivered an average return of 10.13% between 1995 and 1997, whereas 401(k) plans rose an average of 9.06% a year. The discrepancy between plans with the benefit of professional management and those left to novices was even more pronounced in the disastrous 2008, when the median investment return of DB plans was 25.7%. The median return of DC plans? Negative 26.20%.
In addition, fund companies are coming out with a multitude of new asset allocations. Two recent offerings are the Alger Dynamic Opportunities Fund, a mutual fund that will invest both long and short, and the PIMCO Short Term Municipal Bond Strategy Fund, an actively managed exchange-traded fund. 401(k) plan lineups are offering more and more diversification, with actively managed ETFs possibly entering the fray.
Yes, 401(k) plans are getting an extreme makeover.
The importance of stronger 401(k) plans could not be underscored by any other single fact than a mere 10 years ago, 90% of new employees at Fortune 100 companies got a pension plan. Today, a mere 45% do, the balance being served by 401(k)s. Soon, employers will even stop offering outright medical insurance coverage and, through health savings accounts, shift more of the cost burden to employees.
The government is becoming wise to these trends and may even heed calls for additional tax breaks for lifetime income solutions from none other than Putnam Investments CEO Robert L. Reynolds, who has been lobbying Congress for change, one of his points being that 78 million Americans don't have workplace retirement savings plans. The retirement savings gap is huge. If these changes are made, of course the fund industry will benefit. But so will we all.
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