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Employers fix a major flaw in 401(k) plans

(MoneyWatch) If you're planning to retire and need to turn your 401(k) account into a reliable source of reliable retirement income, you're most likely on your own in figuring out just how to do this. As I've written before, most employers don't help their employees with this critical retirement planning challenge; that's a serious design flaw for this type of plan, since it's become the major retirement delivery program for U.S. employers.

I'm glad to report that two major employers have stepped up to the plate and are now helping their older workers with this critical task. United Technologies (UTX) and Southwest Airlines Pilots' Association will be providing options in their defined contribution retirement plans that will enable retiring employees to generate retirement income from their account balances. Let's take a look at each approach.

United Technologies

In late 2011, the building and aerospace gear company announced that it would implement its so-called Lifetime Income Strategy program in its defined contribution retirement plans the following year. This program competitively bids guaranteed lifetime withdrawal benefit(GLWB) annuities among multiple insurance companies within personalized target date portfolios built for United Technologies plan participants. As I've previously written, GLWB annuities provide the flexibility of investing and drawing down your accounts (systematic withdrawals) with the lifetime guarantees of annuities.

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As participants approach retirement, the company's Lifetime Income Strategy program shifts assets from a traditional target-date portfolio into allocated group variable annuity contracts that hold a mix of stock and bond investments. These group variable annuities give participants the potential for growth if markets perform well, but also protect retirement income against market declines. Asset values will fluctuate with the market, but retirement income is guaranteed as long as the participant remains in the program. There is a 1 percent annual charge against assets in the group annuities for this protection.

When participants retire, they begin drawing down their accounts in amounts specified by the GLWB annuities. As in the accumulation phase, the retirement income is guaranteed not to drop if markets decline, but the retirement income might increase if markets perform well. And the 1 percent annual charge for the guarantees continues during retirement.

An important aspect of Lifetime Income Strategy is that a participant can at any time withdraw their remaining funds in whole or in part without penalties. While this will reduce or possibly stop the guaranteed income altogether, it can represent a valuable option for people faced with unexpected financial emergencies. However, people who keep assets in the program will have income guaranteed for the life of the participant (and for the life of their spouse if they elect to cover their spouse with a joint benefit).

Kevin Hanney, United Technolgies' director of portfolio investments, recently said at a client conference sponsored by HR consulting firm Mercer: "This is our retirement plan. It can work like a pension plan in many ways because it provides certainty and security that many older workers want as they transition into retirement. But it offers some important advantages over a traditional defined benefit plan because it preserves the flexibility and control many participants have come to expect from a defined contribution plan."

Southwest Airlines Pilots' Association

SWAPA recently announced that it will offer the Hueler Income Solutions annuity platform to all active, transitioning and retired members. The platform will include fixed deferred, single premium immediate and longevity annuity offerings.

The Hueler Income Solutions platformallows members to competitively buy a fixed, lifetime annuity that pays a monthly income no matter how long you live and no matter what happens in the economy. It's basically a "do it yourself" pension, similar to the traditional defined benefit plans of the past.

John Nordin, SWAPA 401(k) committee chair, recently said in a statement, "We are excited to offer our pilots an institutionally priced annuity distribution option, so that they can establish a lifetime income stream to help meet their core costs in retirement."

The United Technologies and SWAPA approaches each have their own characteristics and different pros and cons. Each approach produces different amounts of retirement income for retirees. Nevertheless, both approaches are reasonable ways to turn your 401(k) accounts into a reliable, lifetime retirement income.

I applaud United Technologies and SWAPA for taking this important step in the design and operation of their retirement programs, and for setting a good example for other employers to follow. Hopefully their example will help other organizations jump off the fence and provide retirement income options in their 401(k) plans to help their employees plan for retirement. There are many viable retirement income options in the marketplace, and there's no good reason for employers to not help their employees with this critical retirement planning challenge.

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