Necessity, they say, is the mother of invention. That would explain the flurry of new changes taking place in the retirement planning industry.
Indeed, unstable stock market conditions in recent years have not only motivated legislators to fix some of the flaws in the system, but also inspired plan sponsors (meaning employers) to create better tools to help their workers meet long-term savings goals.
"There's been a philosophical shift going on for several years from a 'if you build it they will come' mentality to a more paternalistic approach to offering (retirement) plans," says David Wray, president of the Profit Sharing/401k Council of America in Chicago. "After 2002, participants in 401(k) plans, who once believed they could outperform the market on their own, started looking for help. Employers are now coming up with solutions and you see that in a lot of the automated features now available."
Automatic enrollment
Take automatic enrollment, for instance. This program enables employees to automatically enroll in their company's 401(k) -- unless they elect otherwise.
Their take-home pay is reduced by a certain percentage -- generally 3 percent -- which is contributed to the 401(k) plan, though the employee can elect to save more.
Contributions are made on a pretax basis, invested in a manner designed by the plan, and nothing is taxed until distributions are taken.
Some employers are also using the auto escalation feature, which gradually increases their workers' contribution every year.
Currently, the number of companies offering automatic enrollment is holding steady at about 30 percent, but as market conditions improve, that figure could climb to 50 percent, says Nevin Adams, editor in chief of Plansponsor.com, an adviser for the retirement planning industry.
In 401(k) plans, automatic enrollment has tended to increase participation rates to more than nine out of 10 eligible employees, the Treasury Department reports.
Target-date funds
Plans that offer automatic enrollment helped fuel the popularity of target-date funds. That's because the federal government approved these investment vehicles under the Pension Protection Act of 2006 as a default option of 401(k) plans.
Also known as life cycle or age-based funds, target-date portfolios are designed to simplify long-term investing by automatically shifting their allocation (or glide path) of stocks and bonds to become more conservative as the retirement date edges closer.
Target-date funds come in two broad categories.
The "to retirement" variety selects a glide path that is often more conservative, anticipating investors will cash out of the fund once they reach retirement and move their money into an annuity.
The "through retirement" target-date funds, meanwhile, presume the investor will gradually draw down their fund during retirement. Because it assumes a longer time horizon, it tends to be more heavily weighted in stocks.
Some target-date funds suffered mightily during the recent bear market, with losses ranging from 15 percent to more than 40 percent in 2008.
Because some investors claim they didn't understand the risks, the White House recently announced plans to review target-date funds to ensure that employers that offer them as part of their 401(k) plans can better evaluate their suitability for their work force and to require that workers receive clear disclosures about the risk of loss.