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Retirement Planning > Saving for Retirement

Editorial Comment: The last big change in 401(k)? No way

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If you think that automatic enrollment available inside of defined contribution plans is the last big change you’ll see in these plans for the foreseeable future, think again.

At least three other developments are in the wind right now that may bring about more big changes in the DC world–big changes that will impact income advisors and their clients, whether the advisors are benefit plan brokers or independents serving individual clients. This month’s issue of Income Planning includes articles about each development.

For example, DC plans are starting to offer guaranteed annuities as income options inside the plan (see Guaranteed annuities inside 401(k)s are gaining momentum). The trend is gaining momentum, says a new report out from Financial Research Corp., Boston.

The fact that this is happening signals that employees will begin a mental transition that will have significant impact on what happens to plan assets at point of retirement. For most workers, the expectation has been that they will roll their DC assets from their employer’s plan into IRA, once they have retired. But once an employer plan has a viable income option, you can be sure more and more workers will begin to expect to use that option instead.

That may simplify things for retiring employees, but it will surely reduce the rollover planning provided by independent advisors who counsel those workers. It will also require those same advisors to come up with income plans that wrap around whatever it is the employees are taking out of their DC income options. So, independent advisors who think they are not impacted by this DC plan design change should revise their viewpoint. This will have a major impact on the rollover and income planning they do.

The impact of another development is further off, but it still needs watching. This is the recent ruling by the U.S. Supreme court that allows individual participants in 401(k) retirement plans to sue to recover their losses (see High court rules that individuals can sue 401(k) plans under ERISA).

Our article on this includes discussion of potential repercussions, including several raised by American Council of Life Insurers. As stated in our article, ACLI believes it could result in “increased costs for employer-sponsored plans and a concomitant decrease in the number of employers able and willing to sponsor and administer them–thereby decreasing the number of employees participating in these plans.”

The impact for advisors? Those who are benefit brokers will have a rough time replacing lost business, if employers begin to shy away from offering 401(k) plans due to the new legal exposure.

On the other hand, independent advisors who serve employees’ non-plan related needs may see accumulation and decumulation business pick up, and for the same reason–that is, the employees will need to go to them for all, not just some, of their retirement planning. Then again, it could work out that independent advisors will see no bump-up at all; this could happen if employees decide to “go bare”–that is, not set up a personal retirement savings plan at all to take the place of the DC plans that will have gone away in the wake of the legal exposure issues.

That last potential impact is very scary, from a national (as well as personal) retirement planning viewpoint. Let’s hope it never happens. But the abysmal savings rates of baby boomers, even now when DCs are widely available, suggests that this is a distinct possibility. Advisors therefore need to keep a finger to the winds on this development, starting now.

Finally, the Department of Labor has proposed more disclosure provisions that it says are designed to enhance disclosures to beneficiaries of retirement plans (see Proposed retirement plan disclosure provisions too heavy, critics say). Disclosure that clarifies and improves understanding is always a good thing, but disclosure overload has the opposite effect, by creating confusion, misunderstanding and daunting content to digest.

Advisors and anyone else involved in the retirement benefits arena should urge their professional associations and other representatives to weigh in on the new proposals–to ensure that the regulations will further the interests of clarity, not obfuscation.

So, there you have it: the 401(k) world looks so tame right now, but its future looks to be anything but. And this is so for income advisors who work with DC plans as well as for those who work with individual clients.


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