The Changes That Could Be Coming To Your 401(k) Plan

Here’s what you need to know

Congress is considering making some changes in the way Americans save for retirement. Last month it was announced that lawmakers are working on the biggest changes to U.S. retirement savings in more than a decade. The impetus? Washington thinks we need to save more — and research shows they’re largely right. A study released in May from insurer Northwestern Mutual shows that one in three Americans has less than $5,000 saved, and one in three has nothing at all. Here’s a look at some of the changes that could — if approve — give the system a lift.

The age limit on contributions may be lifted

Right now, people older than 70 ½ years are no longer eligible to contribute to traditional Individual Retirement Accounts (IRAs). Congress is looking to lift that restriction. “[People] are concluding they want to work longer, which is a commonsense approach to addressing retirement savings shortfalls,” says Steve Vernon, President of Rest-of-Life Communications and Research Scholar at Stanford Center on Longevity. “They would like to continue contributing to retirement savings so that they can build a bigger nest egg for their eventual retirement.” Vernon notes this would be of particular help to older workers who don’t have a retirement savings plan at work.

Annuities may be featured more prominently

Congress is also exploring a greater role for annuities in 401(k) plans. These are insurance contracts under which workers pay an insurer a lump sum in return for a guaranteed income that can last over a lifetime. Traditional pension plans typically provide this feature, but it’s not so common in 401(k)-style accounts. With an annuity, the insurer continues to pay the worker monthly or annually for as long as the worker lives — which protects the worker from outliving his money. Jack VanDerhei, Research Director at the Employee Benefit Research Institute says that in-plan group annuities would offer lower cost alternatives to protection against longevity risk than retirees can currently pursue in the individual market.

A more open-ended savings account

Lawmakers are looking at a newer, more lenient savings program. This new kind of savings plan would have fewer rules — like not paying a penalty to tap into the plan. “Many workers don’t have any emergency savings, [so] if they experience an emergency, they may tap their retirement savings, even if they incur penalties and income taxes,” says Vernon. “It would be great to build an emergency savings account through payroll deduction, just like they save for retirement. Likewise, it would help to be able to save for college education expenses through payroll deduction,” says Vernon.

Alternatives for employees of small businesses

According to Pew Charitable Trusts, more than 40 percent of employees do not have access to a 401(k) plan. “These are often small employers who don’t have the resources to sponsor a retirement plan. Congress [is looking at helping] by allowing small employers to band together to share resources and buying power through an open multiple employer plan,” says Vernon. The new legislation would encourage small employers to use automatic enrollment and make is easier for employers to automatically raise employees savings rates beyond 10 percent of income (a cap that applies to some plans).

With Hattie Burgher

Jean Chatzky

Jean Chatzky