401(k) Plans Offering Pension-Like Benefits to Ensure Steady Payments
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Here's your money briefing for Tuesday, June 21st. I'm J.R. Whalen for The Wall Street Journal. For many workers, there's an easy way to build up savings for when they retire, automatic contributions from their paycheck into their 401k. The hard part is knowing how to manage that money once you leave the workforce to make it last. To fill in that knowledge gap, more 401k programs are taking a page from pension plans to ensure that retirement funds last as long as possible.
So a managed account company would take over my 401k and would invest the money in a way that's appropriate for me. And increasingly, when I reach retirement, a managed account company would try to help me figure out how to turn that lump sum of savings into a steady or as steady as possible income in retirement.
Coming up, our retirement reporter Ann Turgason will talk about what these kinds of programs offer for workers. That's after the break.
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Millions of Americans contribute to their 401k to provide income once they retire, but a 401k doesn't necessarily offer the reliability of a pension plan that can pay out a steady stream of income. Some 401k providers have incorporated features of pension plans in 401k accounts, but now that effort is being taken a step further. WSJ retirement reporter Anne Tergesen reported on this exclusively, and she's with us with details. Hi, Anne.
What problem do retirees face when managing 401(k) savings after leaving the workforce?
Thanks for being here.
Thanks for having me.
First of all, Ann, just help us with some terminology. What's the difference between a pension plan and a 401k and how they benefit workers?
Sure. So a pension plan is sort of being phased out by a lot of companies now. And in fact, a lot of companies have already gotten rid of them. But with a pension plan, what workers would do is they would work at a company and in return, the company would guarantee them a certain amount of income for life in retirement. And that was through the pension plan. The in the plan and invest it for the employees and turn it into something that was like an annuity or a paycheck for people in retirement. With a 401 , the employer makes the 401 plan available to the workers, but it's up to the worker to decide whether to contribute to the plan and how much to contribute. And sometimes it's even left up to the employee to decide how to invest that money.
And if the worker has, you know, a lot of money at retirement, that's great. But oftentimes a lot of workers fall short with 401ks because it's left up to them to decide how much to save. People don't necessarily know and sometimes they don't save enough.
OK, got it. But now some 401K plans are featuring some of the benefits of pension plans. How does that work?
Now that the baby boomers are starting to retire, 401Ks are starting to focus not only on helping workers save, but also helping retirees who are in their plans figure out how to take money out of the 401K. Because, you know, with an old-fashioned pension, the company would literally just mail worker retirees a check every month.
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