How to Fix Your 401(k) Plan

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As the traditional pension disappears, the 401(k) plan is evolving into something that one day might actually be just as good. That’s saying a lot. The certainty of monthly income for life, which traditional pensions promise, is a high bar. Meanwhile, 401(k) plans have taken their licks.

Collectively, 401(k) plans lost $1 trillion during the recession, ruining any shot of retiring soon for many in their late 50s and 60s. These retirement plans also require ordinary people to make decisions about confusing investment options, and when you retire there is no guaranteed income.

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So the venerable 401(k) needs some fixing, or we need another kind of national savings plan. But before we dis the 401(k) further, consider that it was never meant to be a primary source of retirement security; it was conceived as a savings program to augment traditional pensions and Social Security benefits.

The real problem is that companies began dropping their traditional pensions three decades ago and Social Security benefits also have been eroding. Now the 401(k) is being asked to fill every gap. It’s like expecting your car to float and fly, too.

And yet maybe that day will come. Some plan sponsors are making strides in this regard. The TIAA-CREF Institute has been advocating for the kind of 401(k) plan that would fill most voids left by fading (or failing) pension plans and the crumbling Social Security safety net. The key tenets of a 21st Century 401(k) plan, says TIAA-CREF, include:

Automatic enrollment. Employees should be automatically entered into the company 401(k) plan upon becoming eligible, unless they sign paperwork to opt out. This is the only way to get nearly all workers into a plan. When TIAA-CREF made this change, enrollment went from 63% to 95% of employees and the average salary deferral rate more than doubled to 7%.

Generous match. Many plans match 50 cents for each $1 an employee contributes up to 6% of salary. TIAA-CREF matches dollar for dollar up to 3% of salary. This makes it easier for workers to capture the full match and save enough to produce an adequate retirement income.

Appropriate investment options. To manage risk and properly diversify, employees should have sufficient but not overwhelming investment options. These options should be clearly labeled as growth, aggressive growth or income and as either domestic or international.

Annuities for lifetime income. The investment menu should include annuities for older workers who want to lock up guaranteed income for life even before they retire. Workers should also have the option of easily converting a portion of their 401(k) savings to an annuitized payout plan to enable them to cover, at a minimum, their core living expenses in retirement. This is a critical tenet because it allows a plan participant with enough assets to replace the guaranteed income that a traditional pension offers.

Healthcare savings. Healthcare expenses are routinely cited as retirees’ biggest worry. A modern 401(k) plan should include a healthcare savings vehicle with a separate company match.

Financial education. Without personalized, one-on-one portfolio advice, many employees just won’t get it right. Annual expert consultations, with incentives to attend, solve a lot of problems flowing from lack of investment know-how.

How does your 401(k) stack up? Don’t be afraid to ask for change. Companies have dropped more than just their traditional pension plans over the years. Profit sharing numbers are down. So are the number of companies that match 401(k) contributions (though those have been trending higher the past two years). Some broad-based stock option plans have been eliminated, too. Meanwhile, corporations are sitting on tons of cash and after layoffs may even have fewer employees. They’ve got the resources to fix their 401(k).