All but 16% of plan sponsors polled for the LIMRA Secure Retirement Institute (SRI) “DC Plan Sponsor Perspectives” study indicated someone meets with retiring employees to discuss their distribution options. Among those, 49% said someone from the plan sponsor firm, such as a human resources (HR) manager, meets with retiring participants. Forty percent indicated a representative from their plan provider does so, while 15% said the plan adviser does.
Small employers—and those who do not work with plan advisers or consultants for matters of investment management, plan design or compliance—are the least likely to meet with retiring plan participants.
Only three in 10 plan sponsors that meet with retirees—or arrange for such meetings with plan provider representatives or plan advisers—recommend a particular course of action. As is the case for employee meetings, small employers and those who do not work with plan advisers are the least likely to make a distribution recommendation to their retiring employees.
Plan sponsors cited a variety of reasons they do not recommend any specific action to retirees. One of the most common concerns is fiduciary responsibility (38%); they do not want to go beyond what is required by making a recommendation that could be sub-optimal for the participant, thereby risking legal or other negative consequences. Some are even instructed by their plan advisers (18%) or providers/recordkeepers (11%) not to make a recommendation, most likely to avoid fiduciary problems, LIMRA says.
Nearly half (46%) do not want to adopt a one-size-fits-all approach, recognizing that financial circumstances vary widely across individual retirees. More than one-third (37%) of plan sponsors do not provide distribution option recommendations because plan provider/recordkeeper representatives do so.
Twenty-one percent indicated they do not make recommendations, because retirees have not asked for them.
According to LIMRA, to the extent that such services are in demand and can be supplied efficiently by plan providers, there may be more “outsourcing” of distribution advice in the future.
What Plan Sponsors Wish Retiring Employees Would Do
Among plan sponsors that do provide retiring employees with specific distribution recommendations, only about one-third (31%) suggest rollovers, with the majority recommending installment payments (30%) or annuity payments (26%). LIMRA noted that these respondents are likely referring to annuities outside of the plan because in-plan annuity options are not commonly offered. The results are consistent across employer size.
Only 7% of plan sponsors recommend retiring employees leave all their money in the plan.
Yet, excluding sponsors who have no preference regarding what retirees do with their plan balances, more than two-thirds would prefer them to leave the money in the plan. Nearly half (46%) of all sponsors express this preference, and only 19% prefer that retiring employees take out—e.g., cash out or rollover—their entire balance. The stay-in-plan preference is much more prevalent among those who do make specific recommendations. Seventy percent of these sponsors prefer their retiring employees’ balances remain in the plan.
Among those sponsors that prefer retirees keep their money in the plan, most add the caveat that balances be at least $5,000 or more; plan sponsors are thus generally not in favor of balances below the involuntary cash-out maximum staying in their defined contribution (DC) plans. Such small balances usually add to the cost of running a plan without appreciably boosting the size of the plan, but are rare among retirees.
LIMRA notes that relatively large balances—such as those of retiring employees—may help employers’ bottom lines by making them eligible for lower plan costs per participant. Such considerations may be more relevant to larger plans with greater economies of scale and negotiating power with plan providers; accordingly, sponsors of larger defined contribution plans that responded to the survey are significantly more likely to prefer retirees to keep their assets in the plan.
While these cost-consideration dynamics have been in place for many years, a comparison with past research points to a step-up in preferences for keeping money in the plan. More than two-thirds of sponsors surveyed by LIMRA in 2007 indicated they had no preference for what retirees did with their money. Of those who did have a preference, most wanted retirees to take out all of the money, regardless of the balance size. Comparing these findings with the current survey’s findings suggests plan sponsors today may be more aware of the cost advantage of keeping assets in the plan. With the recent focus on fee disclosure, it is likely that cost sensitivity will continue to increase, LIMRA says.
LIMRA notes that since the focus of discussions with retiring employees naturally centers on distribution and deployment, it poses a challenge for providers’ stay-in-plan retention strategies. But, this situation may change if regulations make conducting rollovers more burdensome or if required disclosures include more emphasis on the benefits of remaining in the plan, LIMRA says.