Data & Research September 18, 2007

401(k) Plans Undergoing Redesign

As the 401(k) plan becomes 'the new retirement superpower,' attention has turned to the weakness of the plans and is leading to 401(k) version 2.0, a research report by Russell Investment Group argues.
Reported by

In its recent report, “401(k)s: The Launch of Version 2.0,’ Russell says that as the industry turns its attention to the shortcomings of 401(k) plans, specific areas are receiving significant attention. These areas include: participation rates, contribution levels, investment decisions, fees, and early withdrawals.

Further, as the defined contribution plan has slowly taken on characteristics of the defined benefit plan, income replacement has usurped wealth management as the most important objective of defined contribution plans.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Version 2.0

The next generation retirement plan is not a savings plan, but instead aims to be a pension plan, Russell says. The Russell Retirement Report 2008 discusses 15 of the most important differences, which are:

  1. Auto-enrollment
  2. Default funds
  3. Brokerage window
  4. Pre-mixed funds
  5. Asset class funds
  6. Education and advice
  7. Asset allocation in the hands of experts
  8. Increased focus on the fiduciary
  9. Fees
  10. On-track reporting
  11. Funding partnership
  12. Implementation efficiency
  13. Post-retirement
  14. Early distributions and borrowing
  15. Company stock

Russell argues that the burden on the defined contribution fiduciary might have seemed less onerous than that of the defined benefit fiduciary, but that misconception is going away with a new generation of 401(k) plans. Fiduciary responsibilities will now include decisions around auto-enrollment, qualified default investment alternatives (QDIAs), brokerage window options, and employee education, to name a few, according to a press release.

“Before our eyes, and at a quite remarkable pace, a new breed of 401(k) plans is being designed, built, tested and launched,” said Bob Collie, director of investment strategy at Russell and author of the Russell Retirement Report 2008, in the press release. “What’s happening is really a redefinition of every aspect of how a 401(k) plan ought to be run, and it all flows from an acknowledgement that these now have to work as retirement provision vehicles and not just savings plans.”

The Russell Retirement Report 2008 can be downloaded at www.russell.com/RetirementReport2008.

Data & Research September 18, 2007

Financial Ties to Parents and Children Affect Boomer Retirement

Boomers, though arguably the most prosperous generation in American history, face mounting demands on their financial resources from both their adult children and their aging parents.
Reported by

In fact, one in six Boomers surveyed is “sandwiched,” providing assistance to both their parents and adult children, according to Ameriprise Financial’s Money Across Generations study.

Boomers surveyed indicated they are using non-retirement related funds to finance their assistance to parents and children. Although half said they are using their day-to-day spending money to assist their adult children, four in 10 Boomers said they draw from their “regular savings,” and one in six even resorts to taking a loan.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Only 6% admitted to pulling money from their retirement savings to help their adult children. In addition, while only 9% of Boomers surveyed said assisting their parents has hurt their retirement savings, twice as many (29%) said assisting their adult children has slowed their savings progress.

The majority of Boomers surveyed said if they got a sudden windfall, they would save it for retirement. If they suddenly had an extra $10,000 and could allocate it to just one thing, 57% said they would put it aside for their retirement. The remaining Boomers said they would opt to spend it on their children (17%), themselves (14%), their grandchildren (5%), or their parents (3%).

Helping Children and Parents

Two-thirds of Boomers surveyed are helping their adult children pay off college loans or tuition, and more than half are contributing to the purchase of a car, a press release about the study said. In addition, more than one-third are helping to cover living costs that include co-signing loans or leases, medical insurance, rent and utilities, and car payments. Overall, more than nine in 10 Boomers said they are financially assisting their adult children in at least one area.

The study also found a considerable number of Boomers are helping their aging parents monetarily in ways ranging from buying groceries (22%), helping with medical expenses and utility bills (15% each), and contributing to rent/mortgage payments and long-term care (10% each).

When asked to choose between the needs of their adult children and their own need to save for retirement, Boomers began to make the connection, Ameriprise said. For example, 65% of Boomers said they would contribute to their own retirement savings at the necessary rate over helping their adult children buy a car or pay off credit card debt.

“It’s when people begin to see their financial generosity as something that must be balanced with their overall financial goals that they appear to understand how much it could impact their ability to fund their retirement,” said Craig Brimhall, vice president of retirement wealth strategies, Ameriprise Financial, in the release. “The reality is that most Boomers already are not saving enough and many still haven’t calculated what they’ll need in retirement.”

Telephone interviews were conducted among 1,001 affluent Baby Boomers (those with $100,000 or more in investable assets); 300 parents of Baby Boomers; and 301 children of Baby Boomers at least 18 years old. Copies of the study report are available at www.ameriprise.com/presscenter.

«