Waiter, there's an annuity in my 401(k)

Guaranteed income during your retirement. That would certainly set your mind at ease. How do you get a guaranteed income? Social Security? Ummm, errr. A company pension? Sadly, those are a relic of the time of Don Draper. A relatively new and untested option, 'hybrid 401(k)s', may be able to provide the guaranteed income you're looking for.

A dozen or so asset managers and insurers, including AllianceBernstein, AXA, Barclays Global Investors, John Hancock, MetLife, and Prudential, are designing a new breed of retirement instrument that combines elements of pensions and 401(k)s. These products—call them hybrid 401(k)s—have begun slowly rolling out. And while they differ in structure, all combine annuities—essentially, insurance contracts that provide periodic income payments—with an investment portfolio. The hybrids won't protect investors from violent market swings. But they'll guarantee a certain amount of monthly income for the rest of your life.

[...]

The structure BGI's finance wonks came up with embeds fixed deferred-income annuities (which provide a set amount of monthly income in retirement) into a target-date fund. A 401(k) participant who chooses SponsorMatch—or whose employer uses it for the matching contributions—would have part of each contributed dollar invested in the annuities and part in the investment portfolio. Essentially, the annuities replace the bonds that would normally be in your portfolio (emphasis mine). If you're in your twenties or thirties, you'd have only a small portion in annuities; but as you age, that portion increases. As with a regular target-date fund, BGI would make those changes for you. Your investment portfolio, comprised of index-based investments, would also be automatically managed for you based on your age. You would simply pick SponsorMatch and sit back. When you received your 401(k) statement, you'd see two pieces: the amount of monthly income you'd have in retirement and the value of your investment portfolio.

Why do we need yet another asset type to put in a 401(k)? A BGI executive makes the argument that 401(k)s weren't meant to be the primary way of saving for retirement. 401(k) investors have historically underperformed institutional investors by 2% a year. There is also the problem of outliving your retirement money. These hybrid 401(k)s promise guaranteed lifetime income (for a price), and are designed to be more like pensions than traditional 401(k)s.

What's wrong with plain old target-date funds?

You might think that current target-date funds would be set up to provide lifetime income, obviating the need for an annuity in the fund. As it turns out, even those funds with the closest target date suffered bad losses in the recent market downturn, impairing their ability to provide income. The reason for this impairment was a heavy stock allocation in those target-date funds.

Fidelity Freedom 2010, which is down 21% year to date, had about 49% of its assets in stocks as of Aug. 31 (these are 2008 dates), according to Morningstar. Vanguard Target Retirement 2010, down 19% this year, had 54% in stocks as of June 30. T. Rowe Price Retirement 2010, down 23% year to date, had about 59% in stocks at June 30.

In fairness, and as one of the fund representatives mentions in the linked story, some of these funds are planning for people with 40 year retirements, which would require a heavier allocation of stocks than bonds in order to make the money last that long. But at first glance I would have expected a 2010 target-date fund to have a much higher bond allocation.

Can we become annuity fans?

Given the fact that the target-date funds hold a high allocation of equities, and the risk of the markets tanking like they've done over the last year, annuities may be a workable solution to the lifetime income problem. Now, I'll come right out and say that I have a bias against annuities. One of the articles addresses this directly:

Academic research has long shown that retirees need monthly income and that annuities make sense in theory, but people don't like them—often for good reason. Many retail annuities sold to retirees are too complicated, too expensive, and too restrictive.

The annuities in the hybrid 401(k) mostly avoid these issues. The fees are only 50 basis points, and there are no fees to cash out. But I have seen nothing about how the hybrid 501(k) will mitigate the insolvency risk of the insurer that is issuing the annuity. In these times, I worry about insurers going belly up and being unable to pay an income stream. Regular 401(k) funds hold stocks and bonds. Short of massive fraud, even if your fund company goes belly up, the stocks and bonds in the fund should still be there. When an insurance company goes belly up, I worry that there might not be anything there with which to pay your annuity.

Enter your state's life and health insurance guaranty association. Each state has a guaranty association that will backstop insolvent insurance companies. There is a Web site, http://www.nolhga.com/, with information about state guaranty associations. For example, in my state of New York, the Life Insurance Company Guaranty Corporation of New York, will only protect up to $500,000 of annuity contracts. I would like to hear more about how the annuities in the hybrid 401(k)s would be insured.

Finally, and off on a bit of a tangent, contrast the insurance guaranty association's annuity protection with that offered by the Pension Benefit Guaranty Corporation (PBGC), which guarantees failed company pension plans. In 2009, the maximum monthly guaranty (with no survivor benefits) for a 65 year old is $4,500. The PBGC monthly guarantee equates to a return of over 10% a year on $500,000, and it's risk free since it's guaranteed by the PBGC.

This rule can limit your 401(k) contribution

(Welcome to those visiting from the Carnival of Personal Finance #178. Read more about the Carnival of Personal Finance. Subscribe to this site.)

There is a little mentioned rule for 401(k) contributions that could limit the contributions (free WSJ Digg link) of the mass affluent or other high earners. The rule is in place to prevent a 401(k) plan from favoring highly compensated employees. Highly compensated is defined as making $105,000 or more in 2008 (this increases to $110,000 in 2009). The basics of the rule are:

higher wage earners can't contribute more than two percentage points more of their salaries than lower wage earners. For example, if highly compensated workers defer 6% of their wages and lower earners save only 2% of their wages, the plan would fail the nondiscrimination test.

This is not a new rule, but it will affect more highly compensated employees as rank-and file employees cut back on contributions to the 401(k) plan to pay other bills. If a 401(k) plan fails this rule, contributions from the high earners in the plan are limited or even returned.

Safe harbor and SIMPLE 401(k) plans not subject to the nondiscrimination test

The IRS has more information on 401(k)s for sponsors and participants at its 401(k) resource guide. Digging through the IRS site you can find that safe harbor and SIMPLE 401(k) plans are not subject to this nondiscrimination rule. A safe harbor 401(k) plan allows employers to make matching contributions or contributions for all eligible employees. The employer contributions are fully vested immediately. A SIMPLE 401(k) plan has different restrictions from the traditional plan, most notably that it's only available for companies with 100 or fewer employees who received at least $5,000 in compensation.

Collective funds instead of mutual funds

Collective funds are like mutual funds, but generally only available in retirement plans (like 401(k) plans), and are increasing in popularity as investment vehicles in 401(k) plans (free WSJ Digg link). The reason that they're replacing traditional mutual funds? They're cheaper.

Just like mutual funds, collective funds pool investors' assets and invest in stocks, bonds and other securities. The chief difference: Collective funds are typically available only in retirement plans. Because they aren't sold directly to the general public, they generally aren't regulated by the Securities and Exchange Commission.

Collective funds tend to be substantially cheaper than mutual funds, largely because they don't have to comply with SEC regulations or market to retail customers. That's driving 401(k) plans to embrace these products, which are offered by big fund providers like Fidelity Investments, Vanguard Group and Charles Schwab Corp. as well as by banks and trust companies.

Only 58% of large defined-contribution plans such as 401(k)s used retail mutual funds in 2007, down from 65% in 2003, according to research and consulting firm Greenwich Associates. By contrast, 39% of such plans used collective funds last year, up from 33% two years earlier. Other common 401(k) investment options include institutional-class mutual funds sold to retirement plans and other large investors, and "separate accounts," which are custom-designed for a single retirement plan.

I checked my 401(k) and sure enough, the funds I'm invested in are collective funds, not mutual funds. In fact, my 401(k) plan offers more collective funds than mutual funds.

Collective fund drawbacks

The Journal story talks about one drawback of collective funds being that they don't have to update their performance frequently, and that their daily prices aren't reported in newspapers. My 401(k) plan publishes daily price changes of the funds on its Web site, so this hasn't been a problem.

Another drawback cited is that collective funds "can't be rolled over to an individual retirement account when the participant leaves the 401(k), so participants have to transfer their funds into other investment options if they take these assets from the plan." However, I don't see this as a big deal since I've never done a direct in-kind rollover from a 401(k) to a rollover IRA when I've left an employer. I've always liquidated the 401(k) holdings and then rolled over.

Americans will be on their own for retiree health care coverage

That's my prediction, anyways. Americans won't be able to count on retiree health care benefits from either Medicare or private company insurance. Take a look at what General Motors just did.

But GM's announcement Tuesday that it would cease medical coverage for its salaried retirees age 65 and above signals that a new era of ever-shrinking benefits has arrived. Beginning in January, even former employees who are already in retirement will lose their benefits, which most of the company's retirees use to supplement gaps in their traditional Medicare coverage. The auto maker will boost monthly pension payouts to help offset the cuts. The company's unionized workers aren't affected by the cut to retiree health benefits.

And here's the advice from the retirement experts:

At this point, employees and retirees "have to feel lucky if they still have retiree [health-care] benefits, and have to start planning for when they won't," says Rick McGill, head of retiree medical consulting for employee-benefits firm Hewitt Associates. He says such benefits are "a dying breed."

Retirement-benefit experts have for some time been recommending that all workers -- even those close to retiring and who've "earned" full retiree benefits -- should assume that those benefits will likely be eliminated, either before or during their retirement, and start planning and saving for it.

Medicare won't be there either

I don't think Medicare will be there to pick up the slack for retirees who lose company sponsored health plans. It's an unsustainable program. Kotlikoff wrote an entire book on the problems. According to Fidelity Investments, which was referenced in the Journal article, "a 65-year-old couple's out-of-pocket health-care costs could reach $225,000 in their remaining years". Sadly, that money is going to have to come from the retiree him- or herself, not from the government. There will no longer be government sponsored health care for the elderly. It's a bum deal, for sure, but we'd better start planning for it.

State and city workers will fare no better than corporate workers

State and municipal workers counting on retiree health care benefits won't make out any better. These old Fortune articles give some good background. Let's not kid ourselves, taxpayers aren't going to fund public sector retiree benefits. They're going to be cut.

Again, this is all very sad, but unfortunately, it's reality. I hope I'm wrong about this, but this doesn't look like a problem that we can grow our way out of.

U.S. rations silver!

I'm trying a sensationalistic yellow journalism headline for this post. Maybe I can get it into the New York World or New York Journal. So put aside the dire headline and delve into what's happening with U.S. Silver Eagles, as told by the Wall Street Journal (free WSJ Digg link).

The government rationed food during World War II and gasoline in the 1970s. Now, it's imposing quotas on another precious commodity: 2008 dollar coins known as silver eagles.

The coins, each containing about an ounce of silver, have become so popular among investors seeking alternatives to stocks and real estate that the U.S. Mint can't make them fast enough. In March, the mint stopped taking orders for the bullion coins. Late last month, it began limiting how many coins its 13 authorized buyers world-wide are allowed to purchase.

"This came out of nowhere," says Mark Oliari, owner of Coins 'N Things Inc. in Bridgewater, Mass., one of the biggest buyers of silver eagles. With customers demanding twice as many as they did last year, Mr. Oliari would like to buy 500,000 a week. But the mint will sell him only around 100,000.

[...]

The rare shortage offers a glimpse into the growing love of a commodity known as "poor man's gold." With more silver mined than gold traditionally, silver has always been far cheaper than gold and today has less than 2% of gold's value.

But silver is growing in popularity, and some investors are betting that its value will surge as inventory shrinks. Big investors are loading up on silver eagles, which are the only American silver coins allowed in individual retirement plans. For small investors, they are an accessible way to get into the metal boom.

"Unlike gold, these coins can be bought by regular citizens," says J.R. Roland, a Brownsville, Tenn., judge who recently began buying the coins -- and trading them on eBay. "In these economic hard times, silver coins are a great way to invest."

While these coins are fun to collect and trade for numismatists, I don't think they make a great investment, even for the mass affluent segment. There are better ways to invest in metals, such as through ETFs or mining stocks. Since the U.S. Mint only sells the coins to wholesalers, individuals are always paying a markup over the real value of the silver in the coin.

The U.S. Mint makes silver, gold and platinum bullion coins in weights of 1/10, 1/4, 1/2 and 1 troy ounce. The gold and silver coins started being minted in 1986, and the platinum in 1998. They have face values on them and are legal tender, but the value of the metal in them is far greater than their face value, so it wouldn't be a good idea to use them at the grocery store. I think it would be a nice to have a complete set of the coins going back to 1986, but purely from a collector's, 'let's give it to the grandkids one day', point of view. Several other countries also mint some beautiful bullion coins, such as Canada and China.

Mack Daddy retirements

Barron's has an article on how much you need to join the elite in retirement. The answer is $25 million.

After selling an Arizona business that he'd built up over 30 years, he retreated to a 30-acre spread on the coast of Oregon and handed a $10 million investment portfolio to a big, New York-based private-banking outfit. The bank, however, seemed less than impressed. Over three years, he says, he received nary a phone call from the reps in the local office. "There was no 'How are you doing?' or 'Maybe you should buy this' or 'How about some concert tickets in Portland?' There was nothing at all." The retiree eventually reached an inescapable conclusion: "I was considered insignificant."

Yes, it takes more than $10 million to be seen as rich these days. It takes more like $25 million. Not only is that the minimum for the red-carpet treatment at a growing number of banks, it is also, in the view of many experts, the sum needed for a truly cushy retirement, one free of financial worry.

"With $25 million, you can fund college and grad school for the kids, take care of your own parents, travel, start a backyard vineyard and, well, "do whatever you want," says Maria Elena Lagomasino, of GenSpring, which helps some 600 wealthy families manage their money. After all, if you simply stashed the $25 million in municipal bonds, you'd have tax-free income of well over $1 million a year.

This isn't the mass affluent level, it's well beyond that. This article brings to mind the Chris Rock rich vs. wealth joke. Also, the retiree mentioned needs to get a new banker, immediately.

While $1 million was once a sign that you had arrived, plenty of people with up to $10 million nowadays don't think of themselves as rich. Many actually consider themselves "middle class," according to survey work by the authors of a new book, The Middle-Class Millionaire. That's increasingly true as the $10 million crowd finds a new intruder in its gated communities: the weakening economy. The delinquency rate for "jumbo" home mortgages -- a category that includes loans for basic McMansions -- more than doubled last year, to 0.74%, according to Fitch Ratings.

True, only a tiny portion of all Americans meet our definition of rich: Just 0.20% of households have net worths of $25 million or more. But in absolute numbers, the group is considerable. If one representative from each of the 175,400 households filed into an NFL stadium at the same time, they wouldn't all find seats. In fact, they would have to go in two shifts -- and even then, some 15,000 would be left in the parking lots, tailgating in their Bentleys.

I'm planning for my own retirement to be much less costly. You don't need that much to sit on an island beach somewhere, nor do you need much for a little sailboat. Plus, I'll have a doughnut shop that will keep me busy in the mornings.

IRA changes in 2008

Vanguard sent me a letter that nicely lays out the legislative changes to IRAs for 2008. Some of these are the result of the Pension Protection Act of 2006.

Direct non-Roth 401(k) to Roth IRA rollovers

Previously, you could roll over a non-Roth 401(k) to a traditional rollover IRA, and then convert the traditional rollover IRA into a Roth IRA. Now you can skip the step of having to roll over into the traditional rollover IRA, and roll over and convert at the same time. There are still tax consequences from converting the pre-tax non-Roth 401(k) into the post-tax Roth IRA. There are income limits of $100,000 as well. More details can be found in the IRS publication, Notice 2008-30.

Q-1. Can distributions from a qualified plan described in § 401(a) be rolled over
to a Roth IRA?

A-1. Yes. The rollover can be made through a direct rollover from the plan to the
Roth IRA or an amount can be distributed from the plan and contributed (rolled over) to
the Roth IRA within 60 days. In either case, the amount rolled over must be an eligible
rollover distribution (as defined in § 402(c)(4)) and, pursuant to § 408A(d)(3)(A), there is
included in gross income any amount that would be includible if the distribution were not
rolled over. In addition, for taxable years beginning before January 1, 2010, an
individual can not make a qualified rollover contribution from an eligible retirement plan
other than a Roth IRA if, for the year the eligible rollover distribution is made, he or she
has modified adjusted gross income (“MAGI”) exceeding $100,000 or is married and
files a separate return.

I won't be doing this anytime in the future, for tax diversification purposes.

Starting in 2010, anyone can convert a traditional IRA (or 401(k)) into a Roth IRA

This year and in 2009, your MAGI, as described above, has to be $100,000 or less to do a traditional to Roth conversion. That limit goes away in 2010. I do plan on doing this in 2010. I feel my traditional, non-Roth 401(k) assets are enough to keep me tax diversified. I'll eventually write a post on how I'll be doing this, as I've been planning it since the laws changed in 2006.

Traditional and Roth IRA income limits increase

The income limits for full deductibility of a traditional IRA increases to $53,000 for single filers and $85,000 for joint filers. The income limits for full contributions to a Roth IRA increases to $101,000 for single filers and $159,000 for joint filers.

Guide to Social Security

No quotes, comments or any analysis in this post. Just a link to the Journal which has a worthwhile read on Social Security (free WSJ Digg link).

ETFs try to elbow into 401(k)s

ETFs are attempting to make their way into 401(k) plans (free WSJ Digg link), a move that the mutual fund industry is pushing back on. According to the story, 14% of total mutual-fund money is 401(k) accounts, while only 1% of ETF money is in 401(k) accounts. Total mutual-fund assets are $1.49 trillion, while total ETF assets are $500 billion. The arguments the two sides are making are:

ETF providers blame mutual-fund companies, some which run some of the biggest 401(k) plans, saying their resistance stems from fear of competition. ETFs in general charge lower fees than average mutual funds.

Mutual-fund purveyors see it differently. They say that they already offer plenty of low-cost mutual funds that track stock- and bond-market indexes as most ETFs do, and that some of the most heavily touted features of ETFs, such as tax efficiency and flexible intraday trading, offer few advantages in 401(k) plans, which already are tax-advantaged and geared toward long-term investing.

The other challenge is the need to develop trading platforms to trade the ETFs in 401(k) accounts.

The logistics of offering ETFs also complicate things: ETFs can be bought and sold on exchanges like stocks, but most 401(k) programs aren't set up to process the trades. And because they trade like stocks, ETFs charge commissions -- costs that can diminish the returns of workers who make small, regular contributions to their retirement accounts.

[...]

To gain a foothold, many ETF providers are either building computerized "platforms" to support trading of ETFs within 401(k) plans or forming partnerships with companies that are. Some firms are devising solutions to minimize ETF trading commissions -- aggregating trades across investor portfolios, for example, to limit the role of stockbrokers and other middlemen.

[...]

Firms like BenefitStreet are trying to narrow that gap. The San Ramon, Calif., company, which runs about $8 billion in retirement money for more than 7,100 plans, started offering ETFs from Barclays Global Investors and others in June on a 401(k) platform it sells to client companies. Its approach involves aggregating ETF trades among, say, hundreds or thousands of employees, to diffuse commission costs. It eventually aims to send trades directly to stock exchanges, bypassing floor brokers.

Another small firm, Invest n Retire LLC in Portland, Ore., already trades directly with exchanges and has a patent pending on the method. Rather than bundle the trades, Invest n Retire processes them throughout the day with an automated system that executes them for a few cents a share. RPG Consultants of New York offers a system that places orders to brokers in bulk daily to help keep costs low.

Admittedly, I don't know all the details of how these systems work, but the aggregation and bundling of trades concerns me. One of the great advantages of ETFs is the ability to trade them like stocks, with near real-time execution of the trades. Another is the ability to put limit orders on ETF trades. Anything which would diminish these capabilities, which is what this aggregation and bundling sounds like it would do. I would suggest enhancing the individual stock trading capabilites already in some 401(k) plans to add ETF trading.

The story has some good nuggets of information about the retirement plan industry:

The plans held an estimated $2.7 trillion at the end of 2006, representing about 17% of the overall U.S. retirement market, according to the Investment Company Institute, a mutual-fund industry trade group. (About half of retirement money is held in defined-contribution plans, which include 401(k)s, and in individual retirement accounts, according to the ICI. The other half is in government pension and private-sector defined-benefit plans, as well as annuities.)

Just over half of the money in 401(k) plans was invested in mutual funds as of the end of last year, ICI statistics show, followed by investments in products offered by insurance companies, banks and other institutions.

The $1.49 trillion of mutual-fund money in 401(k) accounts represented about 14% of total mutual-fund assets in the U.S. at the end of last year. While assets in ETFs have more than quintupled to about $500 billion since 2002, less than 1% of 401(k) money is estimated to be in the products.

Beyond staid IRAs

The Journal has an article on self-directed IRAs (free WSJ Digg link), specifically delving into making home loans in an IRA.

Through a little-known tool known as a self-directed individual retirement account, individuals can pursue a wide variety of investments, from real estate to businesses. Now, at least several thousand people are trying to goose their retirement savings by using self-directed IRAs to invest in mortgages, according to companies that promote the strategy.

[...]

IRA owners pay an annual custodial fee and transaction fees, ranging from $50 to a few thousand dollars a year, depending on asset size and activity. They typically charge borrowers a rate of at least 10%. If the borrower defaults, the IRA can wind up owning the property at a deep discount, since these deals are typically structured with the property as collateral.

But these investments aren't without risk.

For investors, one risk in foreclosing on a house is racking up so many expenses -- from legal fees to repair bills -- that the IRA runs out of money. If that happens, the IRA owner faces a difficult choice: Get a loan, or close out your IRA and pay any taxes or penalties.

Yet they are growing in popularity.

Self-directed IRAs make up less than 2% of the overall $4.2 trillion IRA market, but they are increasing in popularity. And the handful of firms that handle such accounts are logging increased usage by self-styled mortgage lenders.

Self-directed IRAs allow you to invest in other things besides real estate, such as a business, but you have to follow the rules for them set up by the IRS.

Another risk to investors is running afoul of the Internal Revenue Service's rules for IRAs. "You cannot take any kind of fee from your IRA for doing something inside your IRA, and if you have to start using money from other sources to bail out something happening with the loan inside the IRA, that's a big problem," says Natalie Choate, a Boston tax attorney. So it's important to make sure the IRA has enough money in it to pay any legal fees involved in foreclosure, or property taxes and insurance costs if you wind up owning a house for a while before you can sell it.

Investing in real estate or a business would take a considerable amount of capital, more than the $4000 you can put into an IRA in a single year. Presumably, you'd want to use an IRA that had grown into a nice sum, or a rollover from a large workplace retirement plan to fund the self-directed IRA. Self-directed IRAs look to be a way for the mass affluent to attempt to get greater returns and diversify from just stocks and mutual funds.

While doing more research on this topic, I also found this Business Week article from 2006. It talks about some more of the rules you must adhere to:

The biggest risk is "self-dealing," meaning that you've effectively used these tax-deferred funds for current use. Say you take $100,000 from your $1 million IRA to buy property on which you hunt and fish. If the Internal Revenue Service finds out about your personal use of the land, the entire $1 million could be considered distributed, and all the money subject to income tax and withdrawal penalties for account owners younger than 59 1/2. Slott says you shouldn't even let family members use the property, or any other asset in a self-directed IRA. The IRS may decide that there is a benefit to you.

I checked out the site of one of the companies that will help you set up a self-directed IRA, Guidant Financial Group. They offer a number of webinars which I might check out if I have time. Another site to explore is http://www.tomandersonblog.com/.

Yet another resource I've been reviewing is IRS Publication 590 (The IRS publications are excellent resources). According to the publication, there are penalties and taxes for investing in collectibles, borrowing money from an IRA, selling property to an IRA. in a prohibited transaction, that person may be liable for receiving unreasonable compensation for managing the IRA, using the IRA as security for a loan or buying property for personal use (present or future) an IRA with IRA funds. It's a good idea to be familiar with this publication.

Beware fund redemption fees

Mutual funds have had trading restrictions and redemption fees to prevent market-timing for a while now. For example, fund investors may be prevented from making a round trip (purchase and sale) of a fund within 90 days, or they may be hit with a 1-2% redemption fee for selling a fund within 30 days of a purchase. 401(k) plan investors may have been avoiding these restrictions and fees in the past, but that is changing (free WSJ Digg link).

The short version of what's happening:

While redemption fees and trading restrictions aren't new, some investors have been able to avoid these penalties if they hold funds through an "omnibus" account such as a 401(k) plan, which can make it tough for fund companies to detect who's trading and how often. The new rule, which was issued by the SEC in early 2005 after the effects of widespread market-timing became well-known, helps fund companies to peek inside these omnibus accounts and enforce their short-term trading restrictions.

Rules are hitting those who aren't market-timing

But applying these rules are having unintended consequences:

One 47-year-old participant in the plan had a portion of his account automatically switched into the Artisan International Fund. But one week later, he decided to adjust his allocation and moved more than $24,000 from the Artisan fund into a real-estate fund. The participant, who has made only three other trades this year, is hardly a market-timer, Mr. Kaye says. But his move cost him nearly $500 because the Artisan fund charges a 2% redemption fee on shares held less than 90 days.

The participant "felt the system was gamed against him and initially was very resentful," Mr. Kaye says.

[...]

In some cases, retirement-plan participants making regular rebalancing trades -- a practice advocated by many financial advisers -- have been flagged by fund companies as potential abusive traders. In plans provided by ePlan Services Inc., a 401(k) administrator and recordkeeper based in Denver, two participants making regular rebalancing trades were singled out by fund companies for potential trading abuses in the past 90 days, says Mark Gutrich, ePlan's president and chief executive. The firm spent hours researching their trades and calling the participants and ultimately convinced the fund companies that the trades weren't abusive, Mr. Gutrich says.

How to not fall into this trap

To avoid this conundrum, I read and understand the fund's prospectus. The restrictions and fees are all disclosed in the prospectus. My own 401(k) plan has several restrictions on a few of the funds it offers. I make sure I understand the round trip rules and redemption fees. It seems that at least once a year the plan sends me another note about another short term trading restriction being put in, so I don't ignore any notices I'm sent.

Income annuities

A study by UPenn shows that income annuities can ensure an income stream for life at a cost less than that of other assets. The study is cosponsored by a life insurance company that sells annuities, so I'm taking it with a grain of salt.

What it means is that retirees who need a nest egg of, say, $1 million, can live the same lifestyle with as little as $600,000 in an income annuity. Looked at another way, $1 million in an annuity will currently generate about $86,000 a year in income for a healthy 65-year-old male, while the same amount invested in a traditional securities portfolio would currently generate between $40,000 and $50,000 annually, depending on the annual withdrawal rate.

That news could offer hope for the millions of workers about to retire with inadequate retirement savings.

"At 65 years old, you're going to need money, on average, until you're 85," says David F. Babbel, an insurance and risk-management professor at the Wharton School who co-wrote the paper with Craig B. Merrill, an insurance and finance professor at Brigham Young University. "But the problem is that 'on average' means half of the people will need continuing income between the ages of 86 and maybe past 100. That's where [retirement-income planning] breaks down."

Outliving retirement funds is a big risk. I fail to see, however, how an insurance company is going to generate returns from your initial annuity purchase to fund the income stream it has to pay you. I'm skeptical of this study, and annuities don't have a great reputation.

Yet the study also found that consumers have been tepid buyers of income annuities to this point. Many worry about costs, illiquidity in a financial emergency and the bad reputation the industry as a whole is often saddled with because of well-chronicled and dubious sales tactics with some variable annuities.

Retirement tips

I don't plan on writing too often about retirement, since I think there are a number of excellent online sources on the topic already. I do want to point out some tips from BusinessWeek's annual retirement guide. I liked these because they were broken out by age.

Tips for your 20s
Tips for your 30s

A small sampling:

You'll spend $500,000 on each child before they turn 25, so you'll want to be sure to have them off your payroll when you are ready to retire.

Tips for your 40s
Tips for your 50s