401(k) Plan Shortcomings Failing As Retirement Income Program

50027338 - 401k folder register index - retirement and pensionThe current “retirement plan” of choice – 401(k) plans – really aren’t true retirement income plans. While they can be great for accumulating savings, most 401(k) plans don’t do much to help older workers decide if they have enough money to retire, or how to convert their hard-earned savings into a retirement paycheck.

Americans need more help from their retirement plans, they need these plans to take the next step and offer retirement income programs. Recently, collaboration between the Stanford Center on Longevity (SCL) and the Society of Actuaries (SOA) resulted in a new report – Optimizing Retirement Income Solutions in Defined Contribution Retirement Plans: A Framework for Building Retirement Income Portfolioswhich shows how retirement plan sponsors can complete the 401(k) plan’s transition from a savings account to a retirement income plan.

Why now?

Recently, a number of reports have pointed out that America’s older workers need help with retirement income planning.

  • Retirees need help figuring out how much to save for retirement. Several surveys of older workers show that they need and would like help with developing retirement income. Additionally, when asked to guess the amount of savings they need to retire securely, many workers underestimated the amount they would need.
  • Current 401(k) plans lack retirement income solutions. In August 2016, the Government Accounting Office (GAO) issued a report that highlighted that the majority of older workers do not have access to retirement income solutions in their 401(k) plans. About three-fourths of the plans surveyed did not offer annuities where an insurance company guarantees a lifetime payout.
  • In June 2016, the BiPartisan Policy Center issued a comprehensive report with recommendations to address six significant challenges facing our retirement system. One of these recommendations was for plan sponsors to implement lifetime income solutions in defined contribution plans.
  • Regulatory developments are enabling the use of retirement income solutions in tax-qualified DC plans. In July 2014, the U.S. Treasury Department issued regulations that clarify how qualified longevity annuity contracts (QLACs) can be implemented in DC plans. In October 2014, Treasury issued regulations that would enable a portion of accounts invested in target date funds to be transferred to deferred annuities.

Despite a strong desire from the public for better retirement income options in 401(k) plans, robust retirement income options are not widespread among defined contribution plans. One primary reason is how plan sponsors view their defined contribution plans. According to one study, 91% view them as savings plans, while only 9% view them as vehicles for providing retirement income.

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