401(k) plans have become the dominant form of private pensions since their popularity rose in the late 1980’s and through the 1990’s. The plans have obvious appeal to employers over their predecessor, defined-benefit pension plans. For employers, 401(k)s generally cost less while still offering a retirement benefit perk. Employees are offered more control over their retirement funds through these plans and have the added appeal of plan portability.
However, these plans also shift all the risk and responsibility to employees. This can create some significant downsides to 401(k)s. In fact, current trends regarding the state of retirement savings for seniors (discussed in our recent blog) indicate the impact these downsides can have. Through a 401(k) an employee makes all of the difficult decisions themselves such as how much to contribute, how to distribute the contributions, and whether or not to “cash out” during a job change. Even though these are generally not troublesome decisions to have under the control of the employee, they can have major implications in practice as many people make unintended mistakes.
Industry experts have analyzed the structure and state of 401(k)s and there are many coming forward with ideas on how to better utilize this resource or even reform the some of the down falls. While these discussions continue, however, there are many Americans who are planning for and will reach retirement before any major reform could be possible. Additionally, there are resources available right now to help supplement potential shortcomings in current retirement options.
For example, one of the more popular types of life insurance in recent years, the Indexed Universal Life (IUL) policy, can be utilized for this supplemental need. An IUL can be viewed as a type of tax-protected investment structure that has less limitations and more flexibility than a 401(k). The IUL allows policy holders to build a tax-deferred cash value, often with a guaranteed minimum interest rate. Policy structures vary and, depending on the structure, you may be able to take out a one-time payment or a stream of payments over multiple years. Due to the tax-protection associated with IULs and the baseline return guaranteed by the issuing insurance company*, the resulting funds can sometimes be larger than what you placed into them.
Retirement savings strategies are essential for those who wish to take care of their loved ones and enjoy their “Golden Years”. While 401(k) plans offer many benefits, and can result in a modest retirement fund, accessing additional resources can turn a modest retirement into an abundant one. For more information on supplemental retirement resources and IUL options, contact an IFN representative today! 800.921.3100
* Guarantees are backed by the financial strength and claims paying ability of the issuing company.
Coming Up Short, Brookings Institution