Necessity, they say, is the mother of invention. That would explain the flurry of changes taking place in the retirement planning industry.
Indeed, unstable stock market conditions in recent years have not only motivated legislators to fix some of the flaws in the system, but also inspired plan sponsors (meaning employers) to create better tools to help their workers meet long-term savings goals.
"There's been a philosophical shift going on for several years, from a 'if you build it, they will come' mentality to a more paternalistic approach to offering (retirement) plans," says David Wray, the president of the Profit Sharing/401k Council of America in Chicago.
"After 2002, participants in 401k plans, who once believed they could outperform the market on their own, started looking for help," he says. "Employers are now coming up with solutions and you see that in a lot of the automated features now available."
Automatic enrollment
Take automatic enrollment, for instance. This program enables employees to automatically enroll in their company's 401k plans -- unless they elect otherwise.Their take-home pay is reduced by a certain percentage -- generally 3% -- which is contributed to the 401k plans, though the employee can elect to save more.
Some employers are also using the auto-escalation feature, which gradually increases their workers' contributions every year.
Currently, the number of companies offering automatic enrollment is holding steady near 30%, but as market conditions improve, that figure could climb to 50%, says Nevin Adams, the editor-in-chief of Plansponsor, an advisory site for the retirement planning industry.
In 401k plans, automatic enrollment has tended to increase participation rates to more than nine out of 10 eligible employees, the Treasury Department reports.
Target-date funds
Plans that offer automatic enrollment helped fuel the popularity of target-date funds. That's because the federal government approved these investment vehicles under the Pension Protection Act of 2006 as a default option of 401k plans.Also known as life-cycle or age-based funds, target-date portfolios are designed to simplify long-term investing by automatically shifting their allocations (or glide paths) of stocks and bonds to become more conservative as retirement dates edge closer.
Target-date funds come in two broad categories:
- The "to retirement" variety selects glide paths that are often more conservative, anticipating investors will cash out of the funds once they reach retirement and move their money into annuities.
- The "through retirement" target-date funds, meanwhile, presume investors will gradually draw down their funds during retirement. Because they assume longer time horizons, they tend to be more heavily weighted in stocks.
Some target-date funds suffered mightily during the recent bear market, with losses ranging from 15% to more than 40% in 2008.
Because some investors claim they didn't understand the risks, the White House recently announced plans to review target-date funds to ensure that employers that offer them as part of their 401k plans can better evaluate their suitability for their work forces and to require that workers receive clear disclosures about the risk of loss.
Automatic IRAs
Many of the 78 million Americans who don't have access to workplace retirement plans today may soon find themselves enrolled in automatic individual retirement accounts.The Obama administration proposal, which has been introduced before but not yet implemented, would require small employers with more than 10 employees that do not currently offer retirement plans to automatically enroll their employees into IRAs.
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Workers would have a portion of every paycheck withheld and directly deposited into their IRAs -- unless they opted out. Employers would not be required to make matching contributions to the accounts.
Automatic IRA deposits would qualify for the saver's tax credit, which provides a government match for workers' contributions to retirement savings plans.
Continued: A boon for lower-income savers
