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401(k) Plan Sponsors: Workers Can't Afford to Retire

Philip Moeller

The retirement-plan industry regularly extols the virtues of 401(k)s and other retirement investment programs. Yet a survey of the heads of many big employer retirement plans found that nearly 80 percent of them agreed that "the days of working until the age of 65, retiring, and then never having to work again are generally over for most workers."

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BlackRock, the investment management firm, polled 118 heads of generally large employer retirement programs. Their sentiment about the need to continue working reflects inadequate retirement savings of older employees, the decline of traditional pensions, and the changing views about retirement among baby boomers.

"The good news is that the baby boomers are used to doing this," says Chip Castille, head of BlackRock's defined contributions group in the United States and Canada. "They have redefined every stage of life which they've passed through." Today, he notes, "people are entering retirement with a lot more human capital than they had in the past."

BlackRock also surveyed current and retired employees with 401(k)s and found that plan participants are more optimistic than managers about the future adequacy of their retirement benefits. For example, 55 percent of plan administrators said they thought most of their retirement plan participants would need to continue either full-time or part-time work during their retirement years. Only 15 percent of workers felt they would need to continue working during retirement.

Also, BlackRock said, only 43 percent of plan sponsors were confident employees were saving enough to meet their retirement income goals. Roughly two-thirds of workers, by contrast, think they are saving enough.

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Castille said the gap between the promise and reality of 401(k) plans has been greatly narrowed by the Pension Protection Act of 2006. It created new 401(k) tools that have led to higher employee participation, contribution rates, and the use of default investment options, most principally target-date funds.

"The role of the [defined contribution] plan has changed dramatically over the last 30 years," Castille told U.S. News & World Report. Defined-benefit pensions were the major private retirement plan when 401(k)s were adopted in the early 1980s, he notes. "For many people, these [401(k)] accounts were not their primary retirement vehicles ... The first people coming out of these plans did not really put a lot of money into them."

The combination of reduced traditional pensions and low contributions into 401(k)s has thus created a retirement-savings deficit that will make continued work necessary for many older employees. But Castille said the outlook is much more favorable for younger employees who have benefited from recent changes to the plans. "For younger workers, I think the 401(k) system can deliver good outcomes," he said.

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In the BlackRock survey, the prospects of future retirees differed sharply from the views of people already retired. Current retirees are much more optimistic about the adequacy of their retirement incomes. The primary reason is that many more of them benefit from traditional pensions, which guarantee them lifetime income payments.

Pensions, Social Security, and annuities provide secure income that plays a major role for current retirees. "Secure income covers 81 to 100 percent of monthly expenses for nearly six of 10 (58 percent) of retirees polled," Black Rock said. "Across all retirees, on average, secure income covers 76 percent of expenses," with pensions providing most of these payments. While 80 percent of current retirees said they had pensions, only 53 percent of current workers have them, and the total drops sharply among younger employees."

Employees strongly prefer secure-income payments, BlackRock said, and would like their retirement plans to offer a guaranteed income investment choice, which is usually accomplished by converting retirement-plan assets into an annuity. Nearly 90 percent of the surveyed plan sponsors agreed, yet only 11 percent of them now offer such a choice. Another 19 percent said they planned to incorporate a secure-income option into their plans in the coming year. Many plans said administrative work and costs have deterred them from adding this feature to their plans.

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