Rethinking retirement plans

There is increased chatter about the need to revamp how defined-contribution plans such as 401(k) and 403(b) plans are administered. Employers may have to take a look at the types of retirement plans they're offering to employees and provide better education about how to choose investments based on individual retirement goals.

A recent survey conducted by Charles Schwab & Co., shows seven of 10 respondents plan to continue working during retirement -- 26 percent of those part-time and 40 percent alternating between periods of work and leisure. Only 29 percent of respondents said they never wanted to work again.

Changing automatically
Some changes in the way retirement plans are administered have already been felt. Even before the Pension Protection Act was passed in 2006, many companies had adopted automatic enrollment, in which new employees actually have to take action to opt out of their retirement plan to avoid saving money. An informal poll by in May 2008 found that the auto-enrollment trend continues to grow among companies offering defined contribution plans, with nearly four out of 10 companies participating in the poll now offering this feature -- one in five introducing it in 2008 alone.

Studies have shown that automatic enrollment does increase plan participation. For example, prior to automatic enrollment, 26 percent to 43 percent of employees with six months' tenure at three different companies participated in their respective plan. Under automatic enrollment, 86 percent to 96 percent of employees participated, according to a study cited in a 2007 report on private pensions from the U.S. Government Accountability Office.

Another idea that's gaining momentum is to increase the default contribution setting on employer-sponsored 401(k) plans.

"The default settings determine to a great extent what people end up doing," says Stephen Horan, Ph.D., Chartered Financial Analyst, or CFA, and head of private wealth and investor education at the CFA Institute in Virginia. "Suppose you join a company 401(k) plan and they say 'we're going to put 5 percent of your salary into a 401(k), but you can change that if you like.'

"Those default settings have a dramatic effect on what people ultimately do," Horan says. "If the default is zero, participation is far lower than if the default is 5 percent."

Susan Trammell, a New York-based CFA, predicts the emergence of custom retirement plans that are no longer geared toward how you're doing against an index fund like the S&P 500. Instead, she envisions plans that take into account your specific situation, where you are in life in terms of time horizon, liquidity needs and so on.

"You'll have the creation, the bundling and the packaging of products that are really very much tailored toward you," she predicts. "This may come from people who will understand what your needs are in terms of saving, long-term health care and disability --and you will actually be able to see from month to month where you are in terms of your planned goals."


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