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Retirement Planning > Social Security

As Politicians Spar Over Social Security, 401(k) Planners Fill Retirement Gap

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With the growing uncertainty over Social Security’s future, America’s workers are relying more than ever on their employers to ensure they’ll have enough money to retire—and this growing trend toward paternalism is being embraced by mutual fund and insurance companies.

This week, both Putnam Investments and Russell Investments announced new programs designed to help companies track whether their employees’ 401(k) plan choices will afford them adequate savings in retirement.

These announcements came the same week that the U.S. Senate Finance Committee held hearings on tax reform options for promoting retirement security.

Putnam on Wednesday said in a news release that it is bringing its Lifetime Income Score metrics, currently used by defined-contribution (DC) plan participants, directly to the plan sponsors so they can “help positively influence the retirement preparedness of their workers.” Boston-based Putnam is a money management and mutual fund firm.

Russell on Monday said it is proposing “a new framework to help DC plan sponsors better answer the question ‘Are my participants saving enough?’ and in turn to take measured steps through plan design in an effort to improve participant behavior.” Based in Seattle, Russell is a subsidiary of the Northwestern Mutual Life Insurance Co.

Senators on the powerful panel wrangled Thursday with retirement experts from the Employee Benefit Research Institute, the Brookings Institution and the American Society of Pension Professionals and Actuaries over the fate of Social Security and how it can be funded in light of the nation’s crushing deficit and weak economy.

While Democrats favored preserving Social Security and Republicans spoke in favor of the private sector, all agreed that DC plans have become a significant part of the American retirement system.

“The United States has the most successful private retirement system in the world, but for the amount our country spends on retirement savings, are we getting enough bang for our buck?,” said Sen. Max Baucus, D-Mont., chairman of the panel, in a statement. “The average Social Security beneficiary receives only slightly more than $14,000 each year. As a result, most Americans will not be able to retire on Social Security alone.”

Sen. Orrin Hatch (R-Utah), ranking member on the panel, said the private employer-based pension system has become the greatest wealth creator for the middle class in history, especially through 401(k) plans and IRAs.

“More money has been set aside for retirement in defined contribution plans and IRAs than in Social Security,” Hatch said in a statement. “The Social Security Trust Fund holds $2.6 trillion in Treasury securities. But private, employer-based defined contribution plans hold $4.7 trillion. And IRAs hold even more: $4.9 trillion.”

As DC plans’ popularity grows, companies are using 401(k)s not just as an employee recruitment tool, but to help fill the growing gap between what Social Security can pay to retirees and how much they will need to spend in retirement.

Ed Murphy, Putnam InvestmentsIn an interview with AdvisorOne, Putnam Director of DC Services Edmund Murphy (left) said his firm is finding that the more paternalistic plan sponsors want to help employees take on more responsibility for their retirement because they’re not sure about the future of Social Security.

 “What we would say, and I think companies will say this, is that the true measure of a 401(k) plan’s success is that it helps put people in a position where they can live a dignified retirement, so when they retire from working, they don’t outlive their savings. That’s really the objective,” Murphy said.


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