Build a better 401(k)

The fastest-growing segment of the population these days: centenarians.

That might be a testament to medical advances, but it doesn't bode well for a nation of notoriously poor savers.

This has many financial experts and policymakers worried about how aging workers - not just those who live longer than 100 years - will finance a retirement that could last longer than their careers.

Social Security is under stress, and baby boomers are just starting to retire. Traditional pensions that provide an income for life continue to disappear. And the shortcomings of 401(k)s become evident whenever the stock market tanks; the last market crash erased as much as 40 percent of account balances.

This perfect storm has prompted the Obama administration to become the latest to try to tackle the issue of how to secure workers' retirements.

It's now exploring whether annuities that provide a lifetime income stream - like an old-fashioned pension - should be part of 401(k)s. And the president's latest budget proposal expands a tax break for savers and creates a new kind of account for the millions of Americans who don't have a retirement plan at work.

The idea that's generating the most buzz in the financial world is the prospect of combining a 401(k) with an annuity or other option that provides a lifetime income. This would be a major shift for the 401(k) that now basically provides a lump sum at retirement and leaves it up to you to make sure it lasts.

With an annuity, you turn over a wad of cash to an insurance company that promises you a monthly payment for life. For example, a 65-year-old Maryland woman investing $100,000 would receive $619 a month for life, according to

Retiring workers can buy an annuity now, but they usually don't. Annuities aren't cheap, partly because those who tend to buy them are healthy and expect to live to a ripe old age, experts say. And an annuity can come with bells and whistles that make it even more expensive and erode a nest egg further.

"They are complicated," says Alicia H. Munnell, director of the Center for Retirement Research at Boston College. "And you hand over a bunch of your hard-earned cash and go out on the street and get hit by a bus, and it's gone."

But Munnell likes the idea that retirees have some of their 401(k) money converted to an income stream that could cover their regular bills.

Annuities aren't just a hard sell to workers. Only a handful of big employers have added an annuity as an investment option in a 401(k), says Robyn Credico, with the benefits consultant Towers Watson.

Most don't want the responsibility of picking an insurance company that must be around for many decades to fulfill promises to future retirees, she says. And there is the administrative challenge of what to do with the annuity investment if a worker switches jobs, she says.

At this stage, the Department of Labor and the Treasury Department are just gathering information. They're asking for public input on the pros and cons of workers receiving some or all of a nest egg through lifetime payments. And they want to know why workers don't buy annuities now. Is it cost? The complexity? Or do workers prefer the financial flexibility of a lump sum?

We won't know the government's recommendation for some time. But the Retirement Security Project at Brookings Institution, which has proposed other solutions adopted by the administration, has come up with two ways to pair annuities with a 401(k).

Companies could start diverting a portion of 401(k) contributions into an annuity once workers reach age 45, says David C. John, deputy director of the Security Project. This would allow workers to buy an annuity through small payments over many years. Workers would have to opt out if they didn't want to participate.

Another option would take, say, half of a worker's 401(k) to buy an annuity upon retirement, John says. Retirees would try out the payments for two years, and then decide whether to stick with it or opt out,he says. Again, workers could elect upfront not to take part. Retirees with small accounts would be exempted.

Insurers that sell annuities are all for getting a bigger slice of the 401(k) market.

Some retirement experts, though, raise concerns about whether annuity promises would be kept.

"They are only as good as long as the insurance company stays in business," says Rick Meigs, president of 401(k)

He and others support the creation of a federal insurance fund - similar to the FDIC that backs bank deposits - that would guarantee these annuities.

Annuities and other insurance products are guaranteed by associations in each state, but only up to a point, and that varies based on the state. But millions of employees don't have access to any retirement plan at work. For them, the president's budget calls for the creation of an Automatic IRA starting in 2012.

Businesses without a retirement plan and more than 10 employees would be required to give them the option of directing part of their paycheck into an individual retirement account. Workers could opt out. Or, if they choose to participate, they can decide how much they want to contribute.

But if they don't respond either way, 3 percent of their pay automatically would go into a Roth IRA. Employers wouldn't have to contribute anything.

Some pension experts are concerned that workers would end up with an inadequate retirement if they rely only on this account.

"An Auto IRA is a first step," says Karen Friedman, policy director at the Pension Rights Center.

She worries about the fees and penalties on these small accounts. Low-wage workers are the most likely to tap an IRA in an emergency and get hit with a penalty they can't afford, she says.

The president also proposes expanding the saver's credit, a tax break that's currently worth up to $1,000 to low- to moderate-income workers who contribute to a retirement account.

The credit reduces your bottom-line tax bill, which doesn't help millions of filers who don't owe any tax.

Obama's budget would simplify the credit and make it more widely available by raising the income limit for eligibility. Workers would still get 50 cents on every dollar saved, though the maximum credit would be $250 for singles and $500 for joint filers.

One big improvement: If you don't owe any taxes, you would get the credit as a refund. In the future, these refunds could be directly deposited in the Automatic IRA.

Congress, too, is getting creative on how to make us more aware of our retirement picture. It's considering legislation that would require 401(k) statements to project a worker's monthly retirement income based on the current balance, similar to the Social Security benefit estimates workers get each year. The hope is that faced with those woefully low numbers, we'll be motivated to save more.

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