There's a new investment strategy for 401(k) accounts that's trying to overcome two of the retirement plan's biggest drawbacks.
As workers get older, the strategy calls for moving money from traditional investments such as stocks and bonds into annuities.
The goal is to protect employees from market volatility and reassure them that they'll have a dependable source of income for life. Their 401(k) will never run out of money.
Of course, most employers do not provide annuities as a choice in their 401(k) plan.
But Prudential Financial started doing so in 2008 and The New York Times says United Technologies has just become one of the biggest employers to pursue this approach to retirement security.
Based in Hartford, Conn., the company has nearly 200,000 employees who can choose to invest in mutual funds that contain a mix of stocks and bonds and are targeted to the date of their projected retirement.
Unlike a traditional 401(k), the company starts gradually selling off those funds beginning when an employee turns 48 and reinvesting that money into a "secure income fund," which contains variable annuities with stock and bonds.
All of the account's holdings will have been moved into the secure income fund by the time they turn 60.
Those variable annuities guarantee a set minimum income for employees each year, regardless of what happens to the markets.
They can do that because they are insured by one of three companies that compete for the bid each quarter — Prudential, Lincoln Financial and Nationwide.
Employees will be enrolled automatically unless they opt out of the program.
But how much they'll ultimately have to retire on is still based on how much each worker contributes to his or her retirement plan.
Of course, there are some risks associated with this investment strategy.
One of the largest is that the insurer will fail.
In that event, state guaranty associations would insure the annuities, but there's no telling how much they'd cover.
Another caveat is fees.
The insurance for the guaranteed fund only costs a flat 1% of assets invested each year, but that can add up.
“A 1 percent fee sounds relatively innocuous, but if you compounded it over 10 or 25 years, that is a great deal of money," Anthony Webb, a research economist at the Center for Retirement Research at Boston College told the Times. “The value of this thing only accrues to you if you actually hold it until very advanced ages.”
Deciding whether or not this plan is a good financial fit is likely the biggest challenge for employees.
"The program’s inner workings are complicated, and employees will probably have to read and reread the brochure before deciding whether the plan is right for them," the Times reports.