Study identifies major flaw with 401(k) plans

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(MoneyWatch) If you haven't realized it by now, you're on your own when it comes to figuring out how you'll be able to afford to retire on the retirement savings in your 401(k) plan.

That's my conclusion from reading MetLife's recent "retirement income practices study," which surveyed the largest defined contribution (DC) plan sponsors and record-keepers regarding whether they provide lifetime retirement income options for 401(k) plan participants.

Want to know how much retirement income you might receive from your 401(k) account balances? Good luck. Only 28 percent of plan sponsors and half of all plan administrators automatically show online projections of the retirement income that can be generated from a participant's 401(k) account. Roughly the same number show this information on participant statements.

How to fix the 401(k) plan
Do-it-yourself retirement income

Instead of providing this info to plan participants, plan sponsors and administrators are taking a self-service approach: 81 percent of sponsors and 75 percent of administrators offer online tools to help participants prepare their own retirement income projections. Unfortunately, this "do it yourself" approach isn't very popular with plan participants; plan administrators report that these online capabilities are used by 25 percent or fewer of their plan participants.

Want help generating a retirement paycheck from your 401(k) plan? That, too, isn't so easy. Less than half of plan sponsors offer installment payment or systematic withdrawal payments. Instead, the overwhelming majority of plans -- 97 percent -- offer lump-sum payments. Only 15 percent of plan sponsors offer a lifetime annuity payout option.

The above findings aren't surprising when you learn how plan sponsors view their defined contribution plans: 91 percent see their plans as savings plans, while just 9 percent view them as vehicles for providing retirement income.

And that's the crux of the problem. In the past few decades, employers have ditched traditional defined benefit pension plans, which were true retirement plans, in favor of DC plans, which are capital accumulation plans.

Accumulating capital might seem appropriate when you're working and are years away from retirement. But as retirement draws near, you'll need to seriously think about how you'll actually finance your retirement using your account balances. Many surveys report that older plan participants are concerned about these issues. For example, in its "9th Annual Study of Employee Benefit Trends" MetLife reports that 72 percent of younger baby-boomers and 68 percent of older boomers are concerned about outliving their money in retirement.

The first MetLife report mentioned above ends by stating that many plan sponsors and record-keepers think that addressing the retirement income challenge will become much more important in the years to come. The report issues a call to action for plan sponsors to re-frame their DC plan from a savings plan to a retirement income plan. It also urges plan sponsors to provide retirement income options to DC participants and to educate workers about the importance of generating a retirement income that can last a lifetime.

I couldn't agree more! Employers are in an ideal position to help older workers address these issues, and I'd love to see more companies take action to address this challenge. The thought of millions of boomers exhausting their retirement savings and living out their retirement years in poverty is one very important reason why I write this column. Thanks for listening!

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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