UpFront | Published in December 2016

Plan Sponsors Can Help With Retirement Income Strategies

The analysis suggests that participant behavior is affected by plan rules on partial distributions

By PLANSPONSOR staff | December 2016
Vanguard examined the plan distribution behavior through year-end 2015 of 365,700 participants ages 60 and older who terminated employment in calendar years 2005 through 2014.

One important question that was answered was how plan rules on partial distributions might affect participants’ willingness to stay within an employer plan. Eighty-seven percent of Vanguard defined contribution (DC) plans in 2014 required terminated participants to take a distribution of their entire account balance if an ad hoc partial distribution was desired.

Only 13% of plans allow terminated participants to take ad hoc partial distributions. However, plans allowing partial distributions tend to be larger plans, and, as a result, only three in 10 retirement-age participants are in plans allowing ad hoc partial distributions.

The analysis suggests that participant behavior is affected by plan rules on partial distributions. For the 2010 termination year cohort, Vanguard analyzed participants in plans allowing partial distributions separately from participants in plans that do not. About 30% more participants and 50% more assets remain in the employer plan when ad hoc partial distributions are allowed. In the 2010 cohort, five years after termination, 22% of participants and 26% of assets remain in plans allowing partial distributions compared with only 17% of participants and 18% of assets for plans not allowing partial distributions.

Jean Young, senior research analyst at the Vanguard Center for Retirement Research and lead author of the study report, says these findings have implications for the design of target-date funds (TDFs) and retirement income programs. “The tendency of participants to preserve plan assets at retirement supports the notion of ‘through’ glide paths in target-date fund design. In other words, target-date designs should encourage an investment strategy at retirement that recognizes assets are generally preserved for several years, post-retirement,” she says.

“Also, with the rising importance of lump-sum distributions, participants will need assistance in translating these pools of savings into a regular income stream. Based on current retirement-age participant behavior, most of these retirement income decisions will be made in the IRA [individual retirement account] marketplace, not within employer-sponsored qualified plans, although this may evolve gradually with the growing incidence of in-plan payout structures and the new Department of Labor [DOL] fiduciary rule. One way sponsors might encourage greater use of in-plan distributions is by eliminating rules that preclude partial ad hoc distributions from accounts,” she concludes.

Data for the analysis came from Vanguard’s defined contribution (DC) recordkeeping clients between January 1, 2005, and December 31, 2015.

Plan Distribution Behavior as of Year-End 2015 By Assets in Year of Termination Cohort

Remain in Plan
Account Over
Take Cash
Source: Vanguard