401k Plan Fees Drive Asset Retention
401k plan fees are reduced when plan assets increase. 401k plan fees are now driving a strategy which promotes asset retention. Asset retention is garnering growing attention among plan sponsors.
Up until a few years ago, plan sponsors were more concerned with getting employees to save money into their workplace retirement plans than they were with how workers were going to access and withdrawal their savings upon retirement. However, retaining retirement plan assets – and lowering 401k plan fees – is now a top priority for plan sponsors, based upon a BenefitsPro article which cites a new study from T. Rowe Price. According to BenefitsPro, the study conducted an outreach program to plan sponsors that focused on their feelings on retaining assets in their retirement plans. The majority of plan sponsors said they wanted retirees to keep their assets in the retirement plan. One of the reasons included the inverse relationship of 401k plan fees to total plan asset size. The focus on retaining retirement plan assets is a trend that’s expected to increase as time goes and more of America’s aging workforce enters retirement, according to T. Rowe Price.
According to the study, 40% of plan sponsors said they have a clear preference for keeping retirees in the plan. In addition, according to BenefitsPro, the T. Rowe Price research shows a clear difference in focus on retaining assets in retirement plans between sponsors of plans with more than $500 million in assets vs. those with less than $500 million in assets. For plan sponsors with larger plans, half said they would prefer retirees keep their money in the plan. Just 5.7% of plan sponsors said they’d prefer participants to roll their savings over to an IRA or take it as a lump-sum distribution. Smaller plan sponsors’ attitudes toward retirement plan asset retention differ, however. Only about 30% of plan sponsors said they’d prefer retirees keep their money in the plan, whereas 28.4% said their preference would be for money to migrate out of the plan.
BenefitsPro attributes the difference in large plan sponsors’ attitudes toward retaining assets in their retirement plans to their ability to scale, which lowers 401k plan fees. In other words, the more assets they retain, the greater the leverage plan sponsors have to bargain with service providers for lower fees. However, according to T. Rowe Price, this isn’t sponsors’ only motivation. Smaller plan sponsors are likely less enthused about retaining assets in their retirement plans because they are concerned with their ability to handle the administrative burden of managing assets for separated workers.
The research indicates that plan sponsor are overwhelmingly concerned for the best interests of their employees when it comes to retaining assets in retirement plans. Doing so provides participants with a “fiduciary safe haven,” according to the asset manager. Two-thirds of plan sponsors agree that fiduciary protections provided under ERISA mean employees are better off leaving their assets in the retirement plan vs. rolling it over to an IRA. In addition, three-quarters of plan sponsors said that they were motivated to encourage retirement plan asset retention because of the likelihood of lower investment costs available to money that remains in the plan.
However, retaining assets in the retirement plans may equate to greater fiduciary risk — an issue which weighs heavily on plan sponsors’ minds. “If assets are to stay in the plan, it follows that plans will have to offer some form of an income solution. Nearly 60 percent of all sponsors said adding income features to investment menus invites more fiduciary risk,” according to the T. Rowe research. However, the firm’s data shows that plan sponsors think it’s a risk worth taking; just 14% of sponsors said that the risk is greater than the potential benefits of retaining assets in the retirement plan. Risk mitigation could be a benefit of asset retention for sponsors of larger retirement plans, because it enables them to offer lower-cost investment menus, according to BenefitsPro. An added bonus: it helps sponsors mitigate potential fee litigation risks as well.
Despite their decisiveness over the benefits of retirement plan asset retention, plan sponsors are less clear on how to guide retirees’ assets. However, this could have consequences for plan sponsors, according to T. Rowe. As more sponsors consider how to help retirees responsibly draw down their assets, it will likely impact the quality of the income solutions being offered. Plan sponsors are supportive of a holistic income solution rather than a single product, such as an annuity, for example. According to the T. Rowe research, three-quarters of plan sponsors support offering a suite of retiree-friendly income solutions, systemic withdrawals, managed accounts, stable value funds, bond-laddering strategies or annuities vs. a single option. Whether the industry, providers, and regulators embrace a product-agnostic approach to retaining assets in retirement plans and helping retirees with smart drawdown strategies remains to be seen. Plan sponsors may be able to affect change in this regard by pushing providers to offer holistic rather than product-based solutions.