Total Benefits:The Big Goodbye
Do most retiring 401(k) participants stay in their plan?
Think again ...
In a perfect world, retiring 401(k) participants would
remain in their plan, then patiently withdraw 4% of their balance annually. “I
think it has always been a misconception,” says Daniel Oldroyd, a New
York-based portfolio manager for the J.P. Morgan SmartRetirement funds. “The
tax penalty goes away at age 59 and a half, and once participants hit 59 and a
half, they really start to withdraw assets in a lumpy, chunky fashion.”
A 401(k) plan may offer retirees a safe, fiduciary-monitored
place to keep their nest egg, and a range of investments at reasonable fees.
But just 17% of participants remain in their 401(k) plan three years after
retiring, according to an analysis of J.P. Morgan’s participant database
published in J.P. Morgan Asset Management’s recent report “Ready! Fire! Aim?
2012.” In fact, the average participant withdraws more than 20% per year of his
balance at, or soon after, retirement, J.P. Morgan found (see page 48).
Employers can encourage or discour-age retiring workers from
keeping their money in a plan through choices such as whether to allow
terminated workers to take ad-hoc partial distributions. Also, many people may
need access to their savings and not have the luxury of keeping most of their
money in a 401(k) plan, Oldroyd suggests. “Americans have been through a lot in
the past 10 years. There are lots of real-world decisions that participants
have to make,” he says, citing the need to have money to pay their mortgage,
A previous study by The Vanguard Group Inc., in Valley
Forge, Pennsylvania, found a similar pattern of terminated participants taking
assets from an employer-sponsored plan. “Only about one-fifth of retirement-age
participants and one-fifth of assets remain in the employer plan after five
calendar years following the year of termination,” according to the report
“Distribution Decisions Among Retirement-Age Defined Contribution [DC] Plan
Participants,” published in December 2010. “In other words, most retirement-age
participants and their plan assets leave the employer-sponsored qualified plan
system over time.”
These departing retirees “have consolidated their assets
elsewhere,” says Jean Young, a senior research analyst at the Vanguard Center
for Retirement Research. “They have removed themselves from their employer’s
purview.” That might not spell trouble for retirees, however: Seven in 10 retirement-age
participants (which Vanguard defined as those age 60 and older) terminating
from a defined contribution plan preserved their savings in a tax-deferred
account after five calendar years, the study found.