When an employee retires, what do they do with their retirement plan assets? Recent research has indicated that more than ever, retirees remain in their plan, long after they leave their employers. This points to the need for plan sponsors to position plans in a way that benefits retirees for the long term and takes into account their changing preferences.
When a worker retires, they typically have several options on what to do with their 401k savings. They can:
- Remain in the employer's plan without initiating installment payments,
- Remain in their employer's plan while taking installment payments,
- Roll over their assets to an IRA,
- Take their account balance in cash, or
- Pursue a combination of the above strategies.
Vanguard studied retirement-age participants from 2011 to 2021 and found that most retirement-age defined contribution (DC) plan participants leave their employer's retirement plan within five years of separation from service, mostly for a rollover to an IRA. However, when plans permit flexible distributions, retirement-age participants and their assets are more likely to remain in the employer's plan.
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It's clear that many retirees want to preserve their retirement assets, but the features of their plan may be preventing them from doing so. There are several essential elements that, when paired with added benefits such as institutional pricing and ongoing fiduciary oversight, will help retirees find additional value in remaining in the plan.
Eliminate age restrictions
Most importantly, plans should ensure that term-deferred participants can actually remain in the plan through retirement. Plans are permitted to force individuals to exit the plan once they reach a certain age, typically 70. More and more retirees are expressing an interest in remaining in their plan, which can be mutually beneficial. When high-balance accounts remain in the plan, employers can keep the cost of plan maintenance down. On the other hand, participants get the convenience of staying with investments they know and prefer without having to make new decisions at retirement, as well as the ability to consolidate their savings by rolling in other scattered assets into their plans.
Offer ad-hoc distributions and installment services
Our research shows that retirees seek more flexible ways to draw down from their retirement savings based on their unique retirement income needs. Versatile decumulation options, such as installment services and ad-hoc withdrawals, can provide retired participants with an array of options needed to help them turn their savings into retirement income. Installment options have proliferated over the years, and currently, 65% of plans offer them to their participants. However, this also means that about 35% of plans have an opportunity to better serve their retired participants by adopting theses features.
Over the past five years, new plan rules have also allowed a growing number of plans (39% of plans overall and about 73% of larger plans) to allow terminated participants (most of them being retirees) to take ad-hoc, partial distributions, as opposed to forcing a distribution of the entire account balance, as is traditionally customary. According to Vanguard's analysis of the retiree cohort terminating in 2016, nearly 20% more participants and 25% more assets remained in plans when ad-hoc, partial distributions were allowed. This demonstrates that many retirees will remain in their retirement plan if it provides them with tools and services designed to help meet their needs.
Embrace a "through" glide path
In terms of retirement investments like target date funds, many have debated whether they should aim to get investors "to" or "through" retirement. The trend of retirees keeping their money in plans longer supports a "through" glide path in target-date funds—in other words, one that assumes that participants will remain invested into retirement. Since most tax-advantaged assets were not accessed
until after age 70 or later (when RMD rules kick in), a through glide path enables retirees to take advantage of additional years of potential market returns before they begin drawing from their savings.
Adopt cost-effective advice
Regardless of strong plan benefits, in-plan financial advice can be a powerful tool to help your participants plan for a secure retirement and turn their hard-earned savings into retirement income. Whether it's in-person advice provided by a Certified Financial Planner or a low-cost robo-advisor, a spectrum of advice solutions can help retirees navigate their new financial reality and needs and keep them on track to enjoy their retirement. While the value of advice is hard to quantify, research shows that it can provide meaningful basis point increases in annual return, save investors time, and provide the emotional support to help investors achieve peace of mind and financial well-being.
Related: How SECURE Act 2.0 gets Americans on a surer glide path toward retirement
While these findings indicate where plan sponsors may be falling short in serving retired participants, they also present an opportunity to reevaluate. It is imperative for plan sponsors who wish to retain retired participants to assess the changing landscape regularly, and to evolve their plan menus to best serve participants.
Dave Stinnett is Principal and Head of Strategic Retirement Consulting at Vanguard Institutional Investor Group.
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