The Growing Problems With 401(k) Withdrawals

NEW YORK ( TheStreet) -- Company 401(k) plans allow employees to save during their working years and then make withdrawals to provide retirement income.

In recent years, employees have become more adept at saving. But now many employers are concerned that retirees are botching the job of making sensible withdrawals.

Frightened about market uncertainty, some retirees are reluctant to take any withdrawals at all. Other plan participants are raiding their savings, quickly depleting the assets.

A decade ago, the withdrawal problems were not big concerns because there was not much money at stake.

Typical employees had less than $10,000 in their 401(k) accounts. But now the 70 million baby boomers are retiring, and many have been putting money into their accounts for two decades.

Half of 65-year-old participants have more than $80,000 in their 401(k)s. That is enough cash to have an impact on the lives of retirees.

To address the problems, some employers are hiring outside advisory firms to counsel plan participants.

Advisers urge retirees to obtain reliable income by staying diversified and taking systematic withdrawals.

In a typical approach, an adviser urges clients to withdraw about 4% of assets in the first year. After that, retirees can increase payments by 3% annually to provide protection against inflation.

The counseling efforts are still in their early stages. Among the first companies to roll out a service is Vanguard Group . Participants who select the service can receive advice over the phone. Retirees can use the Vanguard Web site to buy annuities or make other investment choices that will provide steady income.

Among the most ambitious services is offered by Financial Engines (FNGN) , an advisory firm. Founded by Nobel Prize-winning economist Bill Sharpe, the company has long provided advice to 401(k) participants on how to accumulate assets.

Last year Financial Engines expanded its services to include special guidance for how to take retirement income. To obtain the full range of services, 401(k) participants pay fees that range from 0.2% of assets up to 0.6%.

Financial Engines currently provides advice to 589,000 participants. So far only a few have started receiving advice on withdrawals.

Those who elect to join the program can talk to an adviser over the phone about how to manage portfolios and take withdrawals. The advice can be customized.

But Financial Engines has developed a model for typical retirees who want to generate steady income. The strategy is extremely conservative. Although some competitors suggest that retirees keep 50% of assets in bonds, the Financial Engines approach calls for putting 80% of the assets in fixed income and the rest in stocks.

"The model is designed to provide a steady stream of payouts -- even if the markets go down," says Christopher Jones, chief investment officer of Financial Engines.