401(k) Plans and IRA Popularity on the Rise

As America ages, the government is taking a closer look at how you spend your 401(k) Plan and IRA.

According to the General Accounting Office, as of 2006, over 66 million Americans were participating in a retirement plan such as a 401(k) or profit sharing plan, a six-fold increase since 1975. Why is the government looking into 401(k) Plans if they have become so popular?

The IRS and the Department of Labor are worried that even though workers are participating in 401(k) Plans, they are not investing the money in a way that will provide them benefits for the rest of their lives after they retire. They are concerned that retired former employees take the money out of their 401(k) in a lump sum, spend it all too soon and don't have enough money to live on later in life.

So in February of 2010, the government issued a notice in the Federal Register seeking comments on if or how the Federal Government should encourage the use of Annuities in 401(k) Plans and IRAs .The government hearing on these issues is scheduled for September 14th in Washington D.C.

Does this mean that the Government will now start telling you how to invest your money in a 401(k) or IRA?

Many people who sent comments into the Department of Labor are worried about just that. For example, in England, over 75% of your retirement benefits must be used to purchase an Annuity by the time you are age 75. The Government already imposes many rules on how you manage your money in a retirement plan. Most people are familiar with the tax penalties if you take money out of a plan too soon or too late. The government is also involved in regulation how much information should be given to plan participants regarding their investment options. However, most experts do not think that the U.S. Government will do what they do in England and mandate that retirees buy Annuities.

What do you think the government will do?

It is too early to tell, but some ideas being considered are:

  • Mandating that all 401(k) Plans give participants an option to buy an Annuity;
  • Mandating more employer or plan-sponsored education of participants on investment options;
  • A default option in a plan that automatically invests your 401(k) in an Annuity, unless you elect out of the Annuity. This is similar to plans providing for automatic enrollment in a 401(k), unless you elect out.