Washington Goes into 401(k) Withdrawal

The Obama Administration has decided we are going to make a mess of managing our 401(k)s in retirement and wants to do something about it. Both the Treasury Department and the Labor Department have signaled their 2010 agendas will include taking a look at how to reform the 401(k) withdrawal process to keep us from blowing through our savings too fast.

The Feds are interested in adding an annuity feature to 401(k)s that would throw off a guaranteed monthly income for retirees based on the amount of 401(k) assets a retiree converts into the annuity.

Given the well documented problems we have had managing our accounts while we are working -- in large part due to poorly designed plans foisted on us -- it's a reasonable concern that we won't be able to get the decumulation phase right either.

In a recent MetLife survey, 43 percent of pre-retirees said a 10 percent annual withdrawal rate would support a comfortable retirement, and another 26 percent said an annual withdrawal rate between 7 percent and 10 percent is just fine. Both assumptions are wildly optimistic; at those withdrawal rates you will likely run through all your retirement money in 10 to 15 years, both of which fall way short of the average life expectancy of a 65 year old today.

That dangerous disconnect is what has the administration's attention. "Increasingly, retirees will have to live on lump sum distributions from 401(k)-type plans. This increases the likelihood that they will run out of assets during their retirement years," said Labor Secretary Hilda Solis in announcing the annuity initiative on Monday.

Read it and Weep? While the Administration is at the "collecting feedback" stage of how (and whether) it makes sense to add an annuitization feature to 401(k)s, a bipartisan triumvirate of Senators wants to push forward with 401(k) legislation that would require plans to include a line item in your annual statement showing how much monthly income your current account balance would throw off based on some basic assumptions. The notion is that it will encourage younger workers to save more, and older workers to run for the nearest guaranteed payment from a fixed annuity. The bill borrows a page from the new Credit Card legislation that will soon require all statements to show the time and total cost of paying off a balance by making just the minimum payment due. Rather than fix the problem, Congress seems content to raise yellow warning flags and hope we're paying attention.

Can you say, Defined Benefit Pension? Any similarity between the Administration's annuity initiative and an old fashioned pension seems purely intentional. A full generation after Washington created the 401(k) and all but held the door wide open as Corporate America ditched their pension plans, this latest reform push is an acknowledgment that what we need is what we have pretty much dismantled: a defined benefit payout.

Adding a fixed annuity option to 401(k)s is indeed a solid idea. But it's all about how Washington executes on the idea. If the private sector is allowed to drive the initiative we'll just end up with a sorry replay of what is already wrong with so many 401(k)s today: lousy and expensive investment options. Stay tuned.

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