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On money

Goodbye, pensions; hello, 401(k) options

By HELEN HUNTLEY
Published August 13, 2006

Have you gotten the message? If you want a decent retirement, you'd better be saving early and often. The pension bill Congress just passed is just one more bit of confirmation that traditional pension plans that pay a monthly benefit are on the way out.

About one in five private-sector workers is covered under that type of plan. Even if your boss offers one, chances are good that your plan will be frozen before you reach retirement age. You can't lose benefits you've accrued, but a freeze would mean your payout would be smaller than you now expect. If you're a midcareer worker, you should be especially concerned since you won't have a lot of time to make up for lost benefits.

The legislation requires companies offering pensions to fund them adequately, which is a good thing. However, the cost of doing so is expected to prompt more companies to close or freeze their plans.

Most private-sector workers will be counting on a savings plan such as a 401k. That means what they'll have at retirement depends on how much they and their companies chipped in and how well their investments performed.

But shockingly, many workers who are eligible for 401(k) plans don't sign up for them. Sometimes it's because they need every dime for living expenses, but often it's a matter of inertia or confusion over investment options. Congress tried to do something about that problem too, blessing the automatic features that companies have begun adding to their plans. Additional guidance on 401(k) investments is expected to be forthcoming soon from the Department of Labor.

Companies won't necessarily adopt all these options, and some may apply them only to new employees, but here are some of the changes you may encounter in the coming months in your 401(k) plan:

Automatic enrollment. Unless you opt out, a small percentage of your pay may be withheld from your paycheck and stashed in your 401(k).

Automatic stepup. Unless you say no, the percentage withheld may increase by 1 percentage point each year, up to a set maximum.

Automatic investment. Unless you make other choices, your money may be invested in a balanced account with stocks and bonds.

Advice. Your company may soon offer access to a computer program (Financial Engines is a popular example) that will advise you on your investment allocation.

A Roth 401(k) option. You may be permitted to make after-tax contributions to your savings that then could be withdrawn tax-free in retirement.

More rollover options. If you wish, you will be able to roll over your plan directly to a Roth IRA and pay the taxes. At your death, any beneficiary may roll over your plan to an IRA. In the past, this benefit was available only to spouses.

Another benefit of the pension bill is the extension of many tax incentives for savings that had been scheduled to expire. Among them: Withdrawals from 529 college savings plans for approved college expenses will continue to be tax-free, a benefit that had been set to expire in 2010.

My son is shopping for a mortgage. Several lenders are offering 80-20 mortgages, which I have never heard of. Is this a good idea? He is not a first-time buyer. It would be the second home for him and his wife.

An 80-20 mortgage is a package of two mortgages designed for people who do not have adequate cash for a down payment. The 80 percent is a standard first mortgage. The 20 percent is a second mortgage or equity credit line at a higher interest rate.

At least in theory, this route is cheaper than taking out a low down payment mortgage and being required to buy mortgage insurance. However, the 20 percent mortgage is likely to be an adjustable rate loan, which means costs would increase as interest rates rise. Also, when you start with no equity in your home, you'll lose money if you have to sell before prices have appreciated.

If your son and his wife own a home, perhaps selling it will leave them with enough money to put 20 percent down on the new house. In that case, they would not need an 80-20 mortgage.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to hhuntley@sptimes.com or write Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731. Read more at www.sptimes.com/blogs/money

[Last modified August 11, 2006, 09:25:19]