There are many different retirement plans available to America’s workers. Individually-established plans, such as Individual Retirement Accounts (IRAs), complement employer-sponsored plans like pensions and 401(k) offerings. It is in 401(k) plans that emerging trends have financial advisors in heated discussions as to the future of these plans.
What are 401(k) Plans?
Before talking about emerging trends in the management and growth of 401(k) plans, it is useful to understand the basics behind these plans. In very simple terms, a 401(k) plan is a retirement plan that is sponsored by an employer. Typically, these plans allow employees to contribute a portion of their monthly paycheck to the plan, and in many such plans, the employer may match contributions. The account holder of a plan can pick and choose how money is invested. Usually, plans offer a combination of mutual funds consisting of stocks, bonds, money markets, and securities. One of the most popular options in employer-sponsored plans is referred to by financial professionals as “target-date funds”. These plans offer a combination of bonds and stocks that become more conservative in investment targets over the course of one’s career. In other words, these funds start out investing aggressively, then move toward lower risk the closer the account holder comes to retirement.
The name 401(k) refers to the tax code associated with these plans. They were originally developed to help employers supplement traditional pension plans while giving employees more incentives to help fund their own retirements. Eventually, the expenses of managing pension plans became too much for many companies, so 401(k)s partially or fully replaced pensions.
Qualified Default Investment Alternatives
Despite its popularity, the target-date funds discussed above have fallen out of favor among discerning financial professionals who are watching trends evolve. Many such professionals see target-date funds as adopting a one-size-fits-all approach and do not offer the flexibility and choice account holders need. Evolution of qualified default investment alternatives (QDIA) has moved to the forefront of the conversation. QDIA structures allow for accounts that are far simpler to manage, while innovation in investment provides better retirement options without the need for additional fees.
QDIA structures are typically associated with automatic enrollment plans. In the United States, up to 35% of all workers do not participate in employer-sponsored 401(k) retirement plans. QDIA structures aim to slash these dismal retirement savings rates; by creating automatic enrollment plans, non-participants could drop to as low as 10% across the country.
QDIA also focuses on long-term investments. Regulations governing the establishment of these structures include:
- Financial products with a mixture of investments that take a participant’s age into account (similar to a target-date fund).
- A service that allocates plan contributions among existing options while taking into account employees’ ages or retirement dates. These are similar to what is called a “professionally managed account”.
- A capital preservation mechanism established for plan sponsors to protect investments for the first 120 days of plan participation. This greatly simplifies administration, especially if workers opt out of retirement plans early.
Trends in QDIA
The defined contribution industry, or DC industry, is watching developments in QDIA very carefully. These investment alternatives are great for asset managers; they provide more stable growth by diversifying, all while protecting investments with more conservative approaches designed for long-term savings.
Most financial experts suggest that QDIA development will be especially critical for insurance companies, who have relied on wealth-accumulation annuity strategies that are experiencing increased pressure. QDIA structures can be used to reduce pressure on traditional insurance annuity plans.
Retirement Savings in Crisis
Because so many Americans are behind on saving for retirement, legislators across the country are bracing for a real financial crisis. It is estimated that nearly half of all American workers do not enough savings for retirement. Government –sponsored retirement benefits like Social Security may not provide enough of a supplement to help, either.
A number of U.S. states are creating legislation that would require almost all businesses to offer and enroll employees in a company-sponsored 401(k) plan. This legislation is mostly targeting smaller businesses (all but the very smallest of companies), as many larger companies already offer such retirement plans. The goal behind this legislation is to increase participation in qualified retirement plans. If a plan is available, more employees are likely to take advantage of it.
Benefits in Bankruptcy
All too often, employees of struggling companies have seen their retirement savings vanish when their employer files for bankruptcy or is forced to go out of business. Emerging legislation to protect the retirement assets of employees is one of the hot 2017 trends. A recent publication by the White House suggests that regulations will be put into place to help employees receive any retirement plan assets after their employing company files for bankruptcy. Bankruptcy managers will be able to access retirement plan assets quickly and distribute them to employees without the long wait associated with current regulations.
Data Security in 401(k) Plans
Recent well-publicized data breaches bring data security to the forefront of any retirement plan conversation. Data breaches from hackers can compromise financial accounts, even eliminating any stored value in the accounts through data theft. Hackers may target anything, and retirement plans are no exception. Companies work hard to protect their employees’ private data, and this includes information about retirement plans. Proposed legislation on both state and federal levels will seek to strengthen data protections, including steps employers must take to secure data from hacking threats.
The proposed legislation puts the onus of data security on employers themselves. Evaluating existing administrative and information systems is a critical first step, but more importantly, reducing access to sensitive financial data will be required. Data security training will also need to be implemented to protect sensitive data from hacking breaches.
Final Words on 401(k) Trends
Since their establishment, 401(k) plans have represented a great way for employees to save for retirement. Still, not all employers offer such plans, and in many cases, employees do not enroll. Incentives like employer-matched contributions sweeten the deal, but only if employees participate in the plans. Legislation to create more opportunities for employees is a great step toward overcoming employee retirement savings shortfalls.
Financial planners watch for emerging trends in an effort to give their clients better service. Trends come and go, and 2017 promises to be an exciting time in the development of additional 401(k) plan options.