More defined contribution (DC) retirement plan sponsors are encouraging retiring participants to keep their assets in the plan.
T. Rowe Price’s recordkeeping data shows that, in 2012, 45% of account assets remained in plans at least a year after retirement. That jumped to 61% in 2018.
One reason more retirees are keeping their assets in their retirement plans is because “the rollover business hasn’t been as aggressively pursued in recent years as it was a decade ago,” says Brendan McCarthy, national sales director for defined contribution investment only (DCIO) at Nuveen. “While the Department of Labor [DOL]’s fiduciary rule was being floated, it dissuaded some advisers from going after the rollover business. Additionally, advisers to retirement plans have taken a stronger role in ensuring the overall financial wellness of participants in the plan. Those two things working together have led to more participants staying in their plans.”
A survey from T. Rowe Price reveals half of plan sponsors with more than $500 million in assets said they would prefer retirees to remain in their plan.
More plan sponsors are beginning to view retirement savings as a journey that extends beyond stopping work, says Lorie Latham, senior defined contribution specialist for the Americas division of T. Rowe Price. “Plan sponsors tell us they are aware that people are living longer and spending more years in retirement,” Latham says. “Philosophically, they are beginning to view retirement as a journey.”
Sponsors also realize that retirees’ balances are the highest of all their participants, and if their assets remain in the plan, “they have the scale to bring down fees,” Latham says.
David Scharf, a principal with Buck, says keeping retirees in the plan can also benefit sponsors because it “keeps retirees connected to the company, which can be of value if any short-term workforce gaps arise. Should a retiree return to service, they can continue to make additional contributions.”
Tim Walsh, senior managing director of product solutions and distribution at TIAA, says his firm’s clients have been moving toward keeping retirees in their plans for the past three to four years. “While the obvious benefit to participants is lower cost, sponsors realize there is also an emphasis on value, better outcomes for participants and more consistent user experiences,” Walsh says. “There has been a lot of talk among sponsors about providing advice to participants in a cost-effective way—especially as they approach retirement, and to help them create short-term and long-term plans as they enter retirement.”
Participants can also benefit from the fiduciary oversight of the plan, as mandated by the Employee Retirement Income Security Act (ERISA), as well as access to stable value funds, which are typically not available in retail accounts, Morgan says. Assets in 401(k) plans are protected from creditors, he adds.
Morgan says if a sponsor decides it wants retirees to keep their assets in the plan, it should have those participants make an active choice to do so. “We know through experience that participants are most engaged when they make an active choice,” Morgan says. He also encourages sponsors to assign a dedicated resource to retirees to help them with their investment decisions and suggests that recordkeepers be prepared to provide that resource.
If a sponsor encourages its retired participants to remain in the plan, it stands to reason that it should address retirement income options, Latham says. She says she believes sponsors should take a multifaceted approach to retirement income.
“The idea of offering a single retirement income product may fall short,” Latham says. “The first step should be enabling periodic distributions or some version of systematic withdrawals. Sponsors should be engaging with participants to help them understand the drawdown process. They can do this by providing them with tools and calculators to create a modeling approach to drawdowns. The approach doesn’t necessarily have to include an annuity. It could mean offering a managed payout option, which is more liquid and easier to explain to participants, or an out-of-plan annuity. There are a lot of platforms sponsors could consider.”
That said, Latham says she believes the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act will “loosen up the conversations related to sponsors’ fiduciary concerns about annuities.” But, without question, “every plan sponsor that decides to encourage retirees to remain in their plan will have a discussion about retirement income options.”
Plan sponsors should educate participants about the benefits of keeping their assets in the plan post-retirement, Walsh says. “Plan sponsors and consultants ask us what they need to do to get participants to understand the benefits,” Walsh says. “We say it is communication, communication, communication, paired with really effective education and tools.”
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