Big Changes Coming In U.S. For Retirement Savers

Michael Abbott’s 401(k) retirement plan is more transparent than most -- which isn’t a high bar to clear.

Abbott is a partner at Gardere Wynne Sewell LLP, a Houston law firm that charges employees a flat fee of about $100 annually to cover the cost of administering the accounts. Most U.S. workers have no idea what their plans cost them, because expenses usually are embedded in investment choices. Savers picking actively managed funds can carry more of the burden for their employers than those choosing index funds.

“The retirement system has been largely set up in a way that the fund companies have control,” Abbott said. “It was making it difficult to figure out exactly what was being paid.”

Change is starting to come as businesses like Abbott’s law firm and larger companies including Micron Technology Inc. are trying to make their 401(k)s more user-friendly and the fees more transparent. It’s among the ways employers as well as lawmakers and academics are redesigning 401(k)-type plans, which have become the main way that private-sector workers save for retirement.

Other proposed improvements focus on making the plans more like regular pensions, stemming early withdrawals from the accounts and lowering costs.

Brief Insert

Part of the problem with 401(k)s is that they weren’t intended for the burden they now support. They were sketched out in an 869-word insert in a much broader 1978 tax law as a supplement to defined-benefit pension plans, which were managed by employers and guaranteed monthly payments to retirees.

Instead, over the next three-plus decades, financial firms sold 401(k)s to employers as an inexpensive way to provide retirement benefits just as corporations were moving away from pensions altogether. Today workers left only with 401(k) plans have had to become skilled investors and hedge against unknowns such as their lifespan and market volatility.

Few people expect a return to traditional pensions so proposals tend to focus on making the current system work better. Here are some of the more interesting ideas and those gaining attention:

Hybrid Plans

State governments have suggested creating savings programs that combine the best features of 401(k)s and pensions to lower costs, provide retirees steadier income and reach workers whose employers don’t offer benefits. Known as hybrid plans, they could triple their share of the retirement market by 2020, according to a report by Global Wealth Allocation.

California passed a law in 2012 that would establish such a plan for private-sector workers, which would pool assets from employees’ paychecks and include a guaranteed rate of return. The state aims to start the plan in 2016, according to the office of state Senator Kevin de Leon, the main author of the bill.

Lawmakers in Connecticut, Maryland and Oregon are looking at similar proposals.