The Target 401(k) Plan

In order to accentuate the positive attributes of our 401(k) system, yet improve on its shortcomings by incorporating elements of traditional pension plans, we have developed a results-oriented plan design referred to as the Target 401(k) Plan. A results-based approach will better assist our nation’s workforce in achieving adequate retirement security.

Current Issues: By many objective measures, the 401(k) plan system has been a tremendous success. As a major part of our newly described “ownership economy,” workers have contributed vast sums of money into retirement plan accounts. An estimated 55 million Americans currently participate in 401(k) plans, and they have accumulated over $2 trillion in assets.

Yet, with all the success achieved by existing 401(k) plans, there are serious questions about whether the system will provide sufficient financial security for future retirees. Alarming statistics indicate that too few employees participate in such plans, workers are not saving enough for retirement, average investment returns are poor, and inappropriate decisions are being made by terminated employees. Even with tremendous resources being devoted to employee education, most employees are still daunted and confused by the decisions they have to make.

In the coming years, too many retired baby boomers will be supported by too few younger workers. Our Social Security system has undergone changes to reduce its pending shortfall, and future modifications are inevitable. As traditional pension plans have become far less relevant as a source of retirement income, 401(k) plans must now evolve from a voluntary savings account into a true retirement plan.

Target 401(k) Plan Design:

• Calculate the salary deferral necessary for each employee to attain an adequate replacement ratio at retirement.
• Utilize automatic enrollment and automatic annual increase features to enroll participants at appropriate levels.
• Manage plan assets as a single investment pool structured to deliver the assumed rate of return on plan assets. Alternatively, individually managed accounts or target-maturity portfolios may be considered.
• Retirement benefits are paid via guaranteed annuity or monthly installment payouts.

Advantages:

• More eligible employees will accumulate savings for retirement.
• More workers will have sufficient assets to maintain their lifestyle in the retirement years.
• Simplified employee communications.
• Improved investment returns.
• Participants will be provided a stream of monthly income at retirement.
• Decreased burden on society to care for retirees.
• Enhanced recruitment and retention tool for employers in a tight labor market.
• Flexible plan design able to meet employers’ objectives, fiduciary obligations, and budget.
• Fully supported by the Pension Protection Act of 2006.