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Monday, January 11, 2010

The shape of things to come for 401(k) plans

Employee Benefit News
By Jerry Kalish
January 1, 2010
…Despite the continuing recession, 401(k) providers will still be … offering more and more features to plan sponsors. …
Here are three more plan features that you are likely to see more of in 2010 and beyond:
Individually managed accounts
This is a plan option through which a 401(k) participant can elect to have his or her account professionally managed. A new survey by Hewitt Associates shows that more midsized-to-large employers are increasing their efforts to help employees meet their retirement income needs by adding outside investment advisory services. Approximately 50% of employees use such services (including advice, guidance and/or managed accounts), an increase from 40% in 2007, and 37% in 2005.
… A DALBAR study showed that while the S&P 500 earned an average return of 8.41% from 1988 to 2008, the average equity investor earned a mere 1.87%.
Regardless of the reason, more employers - particularly smaller employers - will be adding a managed account option that has two components. The first is personalized one-time investment recommendations. After that, participants are responsible for ongoing account monitoring, rebalancing and management.
…The second component of a managed account is ongoing discretionary investment management for a fee, paid for by the individual participant.
401(k) interfaced with payroll
The second 401(k) trend is employers interfacing their plans with their outside payroll provider. …
The appeal should be obvious. It allows employers to reduce their administrative involvement with both payroll and 401(k) plans. An interface allows employee and 401(k) participant data to be shared and updated in the course of the employer's normal payroll processing function. How this translates into cost-savings is an analysis that has to be done on an individual basis.
Distribution planning help
The third trend is employers putting programs in place to encourage terminating employees not to cash out.
While the good news is that the cash-out rate hasn't changed much since 2005 despite job losses, according to a recent Hewitt study, the bad news is that almost 50% of terminated participants take cash distributions.
It's a costly decision in terms of ultimate retirement income, particularly for those in their 20s. Terminated employees who cash out will miss out on years of tax-deferred growth in their account. …
Helping employees make better decisions is more important now than ever before. It's a 401(k) world now for employer-sponsored retirement plans, and the majority of future retirees will never participate in a defined benefit plan that provides a guaranteed income for life. For them, it will be a defined contribution plan, personal savings and Social Security. …

Contributing Editor Jerry Kalish is the founder of The Retirement Plan Blog and president of National Benefit Services, Inc., a Chicago-based employee benefit consulting and administrative firm.