Can a Hybrid 401(k) Save Retirement?

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BGI and MetLife announced their partnership in March 2008. Their deal is currently exclusive, but BGI eventually will be permitted to bring in other insurers—possibly holding auctions when it needs to purchase annuities.

SponsorMatch was formally launched last October, and over several months, BGI's salespeople held a total of 180 meetings with plan sponsors. With everyone fixated on the financial crisis and pensions sinking deeper into the red, nobody wanted to be the first to sign up. Management, however, is taking the setbacks in stride. "We knew that this was going to be missionary work," Mitchem says. Adds Al Goduti, managing director of BGI's institutional business: "Even people who aren't making changes in their plans still want to talk." BGI now hopes to have a client on board by the end of the first quarter.

Greg Williamson, chief investment officer and director of trust investments at BP America, says he was intrigued when BGI briefed him on the new product. BP itself has a strong pension and isn't looking to make a change. Still, says Williamson, who runs BP's $7 billion 401(k), "For those looking at guaranteed income in retirement, this is one of the simpler and easier ways to do that."

As to why many plan sponsors are hanging back, William A. Schneider, a principal at pension consultants DiMeo Schneider & Associates in Chicago, blames a short-term view. "They've had other issues with the markets cratering and their in-house counsels saying, 'Maybe we don't want to roll out new things at this moment,' " Schneider says.

Other companies experimenting with hybrid 401(k)s have encountered obstacles. Players such as Prudential and MetLife-Merrill jumped in early and attracted a few clients. None of their products has gained a big following, but the instruments continue to evolve. AllianceBernstein, for example, plans to launch its own hybrid product with a target-date structure and multiple insurers offering guarantees.

It's too early to say who will win this lucrative competition, but the momentum behind hybrids is building. "This is the next battleground," says Onur Erzan, a McKinsey consultant and co-author of its report on the topic. "I think there's going to be a lot of demand."

When pensions and Social Security provided a safety net for retirees, 401(k)s made sense as add-ons. But with that safety net frayed, it's clear 401(k)s in their current state can't provide a secure retirement for most Americans. For plan sponsors looking to freeze pensions; for asset managers and insurers looking for the next new thing; and especially for employees worried about how they'll pay for their nonworking years, adding guaranteed lifetime income to a 401(k) is one answer. Says Moshe Milevsky, a professor at York University in Toronto: "This is the very beginning of a new way to approach retirement financing."

Amy Feldman is an associate editor with BusinessWeek in New York.