From the August 2008 issue of Investment Advisor • Subscribe!

August 1, 2008

Retirement News and Products

Following the funds flowing into target-date retirement funds, Charles Schwab Trust Company has expanded its offering of target date collective trust funds for retirement plans to include the Schwab Indexed Retirement Trust Funds, which primarily use index strategies. According to Schwab, the Indexed Trust Funds are passively managed collective trust funds, managed and distributed by CSTC, a division of Charles Schwab Bank, that use primarily passively-managed investment strategies in building their asset allocation models. The funds are designed for investments by defined contribution participants and are tied to target retirement dates 2010 to 2050 in five-year increments, Schwab notes. John Sturiale, investment officer for Schwab's collective trust funds for retirement plan clients, said in a release that Schwab has seen "very high adoption of target-date retirement funds with nearly 70% of Schwab Retirement Plan Services clients making them available to their participants."

A newly released paper by the Retirement Security Project, "Increasing Annuitization in 401(k) Plans with Automatic Trial Income," suggests allowing retirees to "test-drive" lifetime income by proposing that a substantial portion of 401(k) and similar plans be "automatically directed (defaulted) into two years of trial income, payable as 24 consecutive monthly payments, when retirees take distributions from their plan." Individuals, the paper says, could choose to opt out. At the end of the trial period, the paper says retirees could elect an alternative distribution option or, if they do nothing, be defaulted into permanent lifetime income. The paper estimates that 75 million Americans will retire over the next few decades, "many of them with larger balances in their retirement accounts and fewer sources of longevity protection to ensure their retirement resources last throughout their lifetime than current retirees." However, few retirees purchase lifetime income products through the private market, the paper notes, with a bias against such products emanating perhaps from their cost or a lack of consumer understanding. "Our current proposal would help take the final step in the strategy of 'DBifying' the 401(k) by seeking to use an automatic approach to revive annuity or lifetime income distributions," noted Mark Iwry, principal of the Retirement Security Project, in a statement.

Recent research by Cerulli Associates contends that boomers must be segmented into two age groups to identify which products and services are most appropriate for them. Segmentation into two groups--older boomers born 1946-1955 and younger boomers born 1956-1964--would allow manufacturers to develop "a narrower lens with which to properly analyze the financial products and services most applicable to each group." Meanwhile, Cerulli also notes that the "looming wave of retirements of older boomers has lit a fire under corporations to limit their growing DB exposure by exercising the option to freeze and pare down the benefits of their plans." Citing statistics from Boston College, Cerulli notes that only 5% of Fortune 1000 DB plans had been frozen or terminated in 2002, compared with 22% in 2007. Forty-four percent of second-wave boomers are at risk of not saving enough for retirement, compared with 35% of first-wave boomers, Cerulli says. Additionally, nearly one-third of 401(k) participants in their 40s are not receiving a full company match, according to Financial Engines.

Reprints Discuss this story
This is where the comments go.