Retirement Plan Providers Try New 401k Ideas

By David Pitt, AP Personal Finance Writer

Several 401(k) providers are rolling out new bells and whistles.

Some of the changes are driven by the realization that many workers haven't saved enough to get them through retirement. In addition, this summer's market volatility amid concerns of a global economic crisis has reduced their balances yet again, prompting many to pull their money out of the market.

"Given the low balances in 401(k) plans, if our industry doesn't help provide better solutions, at some point the government will come under pressure to do something," said Chuck Cornelio, president of defined contribution at Lincoln Financial Group, which provides retirement and other financial services. "Sometimes government solutions are good sometimes they're not."

Here's a snapshot of some of the new ideas emerging in 401(k) plans:

Pension-like income from a 401(k)

Workers are increasingly skeptical about their ability to save enough to retire when they'd hoped. As a result, companies in the 401(k) business are trying to come up with ways to offer their accountholders a guaranteed income stream, much like traditional pension plans once did.

The latest effort comes from Hartford Financial Services Group, which has designed a plan that allows 401(k) account holders to buy what it calls income shares. Each share is guaranteed to pay $10 of monthly income for life beginning at age 65. A worker could buy 50 income shares during working years to generate $500 a month in retirement, for example.

The cost of each income share is based on the person's age, current interest rates, and is predicated on retirement at age 65. The amount of income from each unit will increase if the participant retires later or decrease if the participant retires earlier. Retirement plan participants can buy shares through regular payroll deductions or lump-sum payments.

The income is provided from an annuity that's an investment option within the 401(k) plan.

Here's an example of how it works:

Let's say Maria, a 30-year-old worker with an annual salary of $40,000, saves $200 a month in her 401(k). She wants to be sure she has $500 a month in retirement to cover basic expenses. In order to do that she could contribute $86 a month toward the purchase of income shares until age 65. Her total contribution would be $36,120, yet she would be paid a total of $120,000 from age 65 to 85 — or $500 a month. If she lives longer, the guaranteed income would be $180,000 from age 65 to 95.

Hartford's income shares are portable, which means that the investor can retain the shares and the guaranteed income they provide if he or she changes employers, or if the worker's employer changes retirement plan providers.

The option should be viewed as another investment choice within a 401(k) plan, said Patricia Harris, director of retirement income products at Hartford.

Workers enrolled in the plan can get help creating a retirement plan that estimates what they'll need to pay in basic expenses and put aside enough to cover that amount.

The concept was to create an option that fills the space of a pension plan for 401(k) participants, but enables workers to control and manage the money on their own, Harris said.