Out of the Frying Pan, Into...?

It appears that rumors of the 401(k)’s demise this year have been greatly exaggerated. We will instead witness “an evolution” of the 401(k) this year, says David Levine, principal with Groom Law Group in Washington, which specializes in employee benefits law. Debate will continue about lump sum distributions for 401(k)s, Levine says. Since the 401(k) is now the primary retirement vehicle for most Americans, he says, “there’s been a lot of discussion about why workers when they quit their job can’t take a lump sum distribution out of their primary retirement vehicle.” Another question for debate will be whether 401(k)s should have annuities built into them, he says.

Yet another uncertainty is finalization of the 408(b)(2) fee disclosure regulation and service provider rules, which as of press time the Department of Labor was attempting to get out by the end of the Bush Administration but which were still languishing at the Office of Management and Budget as “in progress,” Levine says. How these rules “will play out in the new Administration is not clear yet.” Ditto with the participant disclosure rules, which dovetails with what Congress will do this year. Rep. George Miller (D-California), chairman of the House Education and Labor Committee, “has expressed an interest in fee disclosures for 401(k) plans, and some of his views were that there should be enhancements or changes to the DOL regulations. Any [personnel] changes that occur at DOL with the [new] Administration could affect where we come out,” Levine says. James Cornell, senior VP and chief marketing officer for Prudential Retirement, said at the event that financial services proposals this year “could be a vehicle for additional regulatory reforms involving the fee disclosure practices, investment offerings, and service relationships for plan providers.”

Expanding the Plan Options

Congress will also look for ways to expand retirement plan coverage–with more discussion on the automatic IRA–considering that 50% of American workers don’t have retirement plan coverage at work. Also look for incentives for guaranteed lifetime income in light of the shift to DC plans, Cornell said, as “policymakers and lawmakers begin to focus on the need to ensure that employees have vehicles that provide lifetime income payouts in their employer-based, defined contribution plans.” There is “increased discussion about new, innovative ways to structure retirement plans,” he noted. Watch the evolution of target date funds or qualified default vehicles, Cornell said, “because I think you’ll see many companies begin to offer target date funds that have guaranteed income components built right into them. There will be a lot of changes at the plan sponsor level.”

From a regulatory standpoint, Levine says he anticipates IRS rules on automatic enrollment rules for the new safe harbor 401(k) plans that were added in the Pension Protection Act. There’s also talk of mandating auto enrollment in 401(k) plans, but he sees that as unlikely. Cornell of Prudential cited recent research from the Profit Sharing/401(k) Council of America, which found that use of so-called auto pilot programs approved under the PPA “continues to rise dramatically.” Auto enrollment, he said, “is gaining widespread acceptance and is gaining a correspondent rise in participant rates. Moreover, almost half (49.7%) of all plans with auto enrollment now also include the feature called auto escalation or increase.” But one disturbing trend, Cornell noted, is an increasing number of firms that are temporarily suspending their DC plan match, which could diminish the overall number of new participants.