January 2013

Total Benefits:The Big Goodbye

Sam D’Orazio

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, for one.

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.