Help Maximizing Retirement Accounts

Ann Tergesen for the Wall St Journal writes:  Services that aim to help investors turn retirement savings into a steady income stream are coming to 401(k) plans and individual retirement accounts—and they may help retirees stick to a plan that will keep them from outliving their savings.

But anyone considering such services needs to understand how they generate a monthly paycheck and what the costs might be.

Currently, 28% of 401(k) plans feature at least one product or service designed to help participants convert their savings into retirement income, according to Aon Hewitt, a record keeper for 401(k) plans. The most popular option is a managed account that includes a retirement income service. With this, 401(k) participants hire professionals to advise them on how to invest their assets and withdraw a sustainable income.
With the oldest baby boomers turning 67 this year and defined-benefit pension plans falling by the wayside, there is "growing recognition that 401(k) plans need to do a better job of delivering income in retirement," says Alison Borland, vice president of retirement solutions and strategies at Aon Hewitt.

Managed-account providers have introduced an array of retirement-income services in recent weeks. Financial Engines FNGN -1.84% of Sunnyvale, Calif., and San Diego-based GuidedChoice now offer income-planning and investment management services—previously available only in 401(k) plans—to those who open IRAs at a handful of specific companies.
Morningstar MORN -0.13% recently introduced its own income-planning service, Retirement Manager With Income Secure, to 401(k) participants who use its managed accounts.
Each company takes a different approach to creating a retirement income stream.
Take a 65-year-old man with $250,000 in assets in a 401(k) and IRAs. Assuming he needs all $250,000 to cover essential expenses in retirement, Financial Engines would put 80%—or $200,000—in a portfolio of bond funds, with the remaining $50,000 in stock funds. Over time, it would move the $50,000 into bonds as well.

Assuming the stock market delivers average annual returns of 5.5% above the one-year Treasury bond rate, he will be able to withdraw $9,375 the first year and then increase that amount by 2.5% to 3% in each subsequent year. If all goes according to plan, enough money will remain at age 84 to finance a fixed immediate annuity that locks in a comparable income for life. 

GuidedChoice and Morningstar, in contrast, recommend a mix of stocks, bonds, cash and any annuities available in a client's 401(k) plan, tailored to the individual's financial situation. GuidedChoice also provides a strategy to maximize Social Security, a service Financial Engines plans to add later this year.

Financial Engines and GuidedChoice both can provide regular paychecks from the 401(k) and IRA assets they manage. All three companies advise clients on how much they should draw from each of their accounts annually and aim to minimize taxes. 

All this service comes at a cost. Financial Engines and Morningstar offer free income-planning advice to clients with managed accounts, who typically pay from 0.15% to 0.7% of assets a year, in addition to the fees of the mutual funds they invest in. GuidedChoice charges up to 0.25% of assets for a managed account, plus $250 a year for an income plan.