Investing February 5, 2009, 5:00PM EST

Can a Hybrid 401(k) Save Retirement?

The holy grail is a pension/401(k) mixture that pays out for the rest of your life—but shaken administrators may not be ready for it

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With Social Security on shaky ground and pension plans disappearing, more retirees will have to rely on their 401(k)s to support them in old age.

That's not very reassuring to anyone who has dared to tear open a recent statement and peek inside. The market meltdown is the chief culprit. But even if the economy were rock-solid, 401(k) plans would still be a problem. For years, most investors haven't saved enough, allocated their assets wisely, or figured out how to draw down those assets in ways that would make them last a lifetime.

If you're approaching retirement right now, there's no easy fix for your portfolio. But if you are in midcareer, you may soon have a chance to structure your 401(k) in a much different way. A dozen or so asset managers and insurers, including AllianceBernstein (AB), AXA (AXA), Barclays Global Investors (BCS), John Hancock (MFC), MetLife (MET), and Prudential (PRU), are designing a new breed of retirement instrument that combines elements of pensions and 401(k)s. These products—call them hybrid 401(k)s—have begun slowly rolling out. And while they differ in structure, all combine annuities—essentially, insurance contracts that provide periodic income payments—with an investment portfolio. The hybrids won't protect investors from violent market swings. But they'll guarantee a certain amount of monthly income for the rest of your life.

Among all the competitors, San Francisco-based Barclays Global Investors (BGI), one of the most successful units of Britain's troubled Barclays, is regarded as a trailblazer. BGI is the world's largest asset manager, with about $1.9 trillion under its control. It's a research-oriented shop that invented such now-familiar retirement products as index investment strategies and target-date funds, which shift their asset allocations as the owner approaches retirement. Its latest idea is to make 401(k)s more like pensions so participants receive income for their entire retirement. The result is SponsorMatch, a product that combines a target-date fund and an annuity.

Employees in SponsorMatch will end up with roughly half their assets in annuities by the time they reach retirement age. That's a potential lifesaver—and, of course, it helps BGI. The firm's business in 401(k)s and other defined-contribution plans has about $250 billion in assets. Not a puny sum, but it's a mere footnote to the company's massive pension operations at a time when 401(k)s have been growing and pensions shrinking. "This is a business opportunity, but it goes beyond that, to almost a moral calling," says BGI Chief Executive Blake Grossman.

The timing for this new hybrid product has proved tricky, however. With trauma spreading in the financial markets and corporate plan sponsors preoccupied, BGI has yet to find its first institutional client among the large corporate 401(k) plans it has targeted. Some of BGI's rivals have nabbed early adopters for their own hybrid products, but all have struggled. "We are in the same stage of development with these retirement products as we were with electronics 20 years ago. We are going to find out what the public likes," says Don Ezra, global director of investment strategy at Russell Investments and author of the forthcoming book, The Retirement Plan Solution. "Twenty years from now, there will be a clear winner."