401(k) changes give savers a brighter future

BOSTON -- If you're one of the 72 million workers with a 401(k), you should consider 2010 a very good year. And 2011 might even be better, according to experts who track what some consider the retirement plan of record for many Americans.

BOSTON -- If you're one of the 72 million workers with a 401(k), you should consider 2010 a very good year. And 2011 might even be better, according to experts who track what some consider the retirement plan of record for many Americans.

So, what were some of the best (and worst) changes that were made to 401(k) plans in 2010 for the benefit of workers and what sort of changes should be made in 2011? Here's what experts had to say.

NEW 401(K) FEE DISCLOSURE RULES: In October, the Labor Department's Employee Benefits Security Administration issued a new rule (effective Dec. 20) that requires plan fiduciaries to disclose more information about 401(k) fees and expenses -- including quarterly statements of plan fees and expenses and information about the cost of their investments -- to participants.

According to Greg Burrows, the senior vice president of retirement and investor services at Principal Financial Group, the new rule is good for both employers and participants.

"The new rule levels the playing field and makes it easier for employers to compare fees and services," he said.


"For participants, we like the Labor Department's model format that can be used to disclose the additional required information. It includes a chart that allows participants to compare investment option information. We believe this chart is a welcome addition to existing fee and investment communication."

Others, however, see the fee disclosure rule as good for plan sponsors but not so much for participants.

"The fee transparency regulation at the plan sponsor level was a good thing, helping plan sponsors obtain better fee data from providers," said Lori Lucas, a chartered financial analyst and executive vice president at Callan Associates.

"Fee transparency at the participant level could create some significant headaches for plan sponsors, and may go ignored by participants. I don't know if it on the worst list, but definitely on the potentially problematic list."

The blizzard of paper about to fall on 401(k) plan participants could indeed have adverse consequences for participants.

"Fee-disclosure regulations can ultimately benefit participants if they actually provide useful information for participants," said Laurie B. Nordquist, director of Wells Fargo Institutional Retirement and Trust.

"If the requirements of the regulations actually result in just a lot of volume -- pages and pages of information that is difficult for participants to understand -- then the fee disclosure regulations could have a negative effect."

And still others view the fee-disclosure rule as if not bad, certainly problematic for plan sponsors.


Bill McClain, a principal with Mercer's retirement, risk and finance business, said in the year ahead employers should start talking about the fee disclosure with participants sooner rather than later. "Careful preparation can help participants understand and make appropriate use of the new information," he said.

ROTH IN-PLAN CONVERSION OPTION: The Small Business Jobs and Credit Act, which was signed into law on Sept. 27, has a number of provisions that affect those saving for retirement, including one that allows participants in 401(k), 403(b) and governmental 457 plans -- beginning Jan. 1, 2011 -- to roll over pretax account balances into a Roth account instead of having to roll those assets into an outside Roth IRA. And that in effect helps those saving for retirement save more money on an after-tax basis.

"Every organization is made up of a diverse group of people, each with their own individual needs when it comes to saving for retirement," said Anne Arvia, Nationwide's senior vice president of retirement plans. "This legislation provides workers with an additional resource when planning for retirement."

Mercer's McClain, however, expressed disappointment with the IRS for opening the door to do in-plan Roth conversion so late in the year and with so many unanswered questions around how to implement the feature.

"Guidance was provided at the end of November, but that left insufficient time for plan sponsors to take action in 2010 to take advantage of one-time tax opportunities," he said.

EMPLOYERS REINSTATE MATCHES: In 2009, many employers stopped matching their worker's contributions. In 2010, however, some employers reinstated their matching programs. "Widespread reinstatement of matching contributions was probably the best initiative in 2010 by plan sponsors," said Lucas.

But even though many firms reinstated the match, it wasn't widespread enough, according to David Wray, the president of the Profit Sharing/401k Council of America. According to Wray, 60 percent of the 15 percent of companies that suspended their matches have yet to restore them.

"This has resulted in gradually declining participation and deferral rates at these companies," said Wray.


As for 2011, many experts want to see changes to the match formula.

"I would also like to see plans change the matching formula so that participants need to increase their contributions to maximize the match," said Patricia Advaney, a senior vice president with Diversified Investment Advisors.

For instance, plans should move from 50 percent on 5 percent employee contribution to 25 percent on 10 percent employee contribution. That's the same maximum contribution per participant, but it encourages higher savings.

AUTOMATIC ENROLLMENT, AUTOMATIC ESCALATION, AND THE LIKE: Stacy Schaus, senior vice president at Pimco and author of "Designing Successful Target-Date Strategies for Defined Contribution Plans: Putting Participants on the Optimal Glide Path," said some of the best and worst changes to 401(k) plans center on automatic enrollment, automatic escalation and automatic rebalancing.

"It's great news that more plans are implementing automatic enrollment, but too few of them are implementing it in a way designed to optimize participant retirement income outcomes," said Advaney.

"Far too many plans with automatic enrollment are choosing default rates that are too low, with no auto escalation features, and only implementing for new hires."

Advaney said automatic enrollment does boost the percent of workers participating in a plan, but it can "lead to a deterioration in average deferral rate."

What's more, she said "this trend creates a new group of unengaged participants who may be lulled into a sense of complacency because they actually think they're doing what they need to do for retirement, when in fact they're probably saving too little, and may be in an inappropriate investment fund."


INVESTMENT OPTIONS: More than a few experts said plan sponsors also changed the number and type of investment options in 401(k) plans for the better. Many sponsors reduced the number of investment options and added target-date funds, said Robyn Credico, the defined-contribution practice leader in North America for Towers Watson.

LIFETIME INCOME: The Departments of Labor and Treasury solicited comments and held hearings on lifetime income options in retirement plans this year and that, according to Ed Moslander, a senior managing director of institutional sales and services at TIAA-CREF, "helped bring the importance a lifetime stream of income to the forefront of the national conversation about retirement security."

Those hearings were a bright spot for 401(k)s, some say. But there's still more to be done when it comes to translating nest eggs into pay checks. Currently, most retirement accounts emphasize wealth accumulation, with little thought to how that wealth will translate into retirement income, Moslander said.

"A guaranteed income option, via a low-cost, fixed annuity, for example, can help ensure that workers build lifetime financial security -- much needed in an era when people are living longer," he said.

TARGET-DATE DISCLOSURES: In November, the Labor Department released rules that would require more disclosures about the design and operation of target-date and similar funds. Specifically, the new rules would require an explanation of the investment's asset allocation; how that allocation will change over time, with a graphic illustration; and the significance of the investment's "target" date.

"The Labor Department's target-date-fund communication initiative should help participants better understand such funds, and is a positive," said Lucas. And Burrows said: "This regulation provides uniformity in explaining how target-date funds work and will help participants make the right choices."

THE YEAR AHEAD: While 2010 will go down as a mostly good year for workers with a 401(k), there's much more to be done in 2011 to improve retirement security.

For starters, Burrows said there shouldn't be any more major regulations. "The industry and plan sponsors need time to absorb and adapt to the slew of regulations that have been handed down in the past two years," he said.


In addition, the government, and those involved in the 401(k) industry should focus more on enhancements and not overhaul.

"The voluntary employer-sponsored 401(k) has helped millions of Americans save trillions," Burrows said. "We should use this successful platform to address two key challenges: a lack of access to retirement plans and inadequate savings rates."

For instance, Burrows wants to encourage more employers to sponsor retirement plans and he wants greater focus on what's being called retirement readiness. Others also want more to happen on this front.

"I see increased involvement and interest from regulators and legislators in helping plan participants with retirement readiness," said Robert Holcomb, vice president at JPMorgan Retirement Plan Services.

"The focus will be primarily on the spend-down or decumulation phase, both in terms of helping to ensure that participants have enough for their retirement and on providing encouragement and guidance to plan sponsors on how they can help employees."

At the moment, however, the industry has a long way to go on that front.

"I would like to see employers more engaged in helping retiring participants with their decision-making," said Wray. "Only a third of our companies have special education programs for their retiring participants. I expect this to be the next place for major change."




--Read the IRS' guidance about in-plan Roth conversions:,,id=231775,00.html

--Read the Department of Labor's proposed rules on disclosures for target-date retirement funds:

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