In the past, employers were eager to have terminated employees withdraw their money from corporate sponsored retirement plans like 401(k)s out of the plan to limit their liability and work. Plus, if the separation was difficult, who wants to deal with that former worker? But times are changing according to a Wall Street Journal article (subscription required) starting with larger companies who are actively marketing to retirees to keep their money in their corporate retirement plan.
Baby boomers have an estimated $4 trillion in defined contribution (DC) plans like 401(k)s and 403(b)s and in 2013, the amount of money that was withdrawn exceeded new contributions for the first time. The IRA industry has done a great job marketing to separated employees though, according to some experts, IRAs may not be such a good idea. Similarly, some advisors have built a business around marketing IRAs to older workers.
Why the change by plan sponsors? More assets in the plan means more leverage with service providers resulting in better service at lower costs. Some employers want to help their that may not have access to advice by a fiduciary when they roll their DC assets into an IRA while costs will generally be higher and returns have been 50% lower from 2000-2012 according to the Center for Retirement Research.
The government has also taken notice. The DOL’s pending conflict of interest rule would make more financial advisors a fiduciary when working with IRAs.
While larger companies may have the resources to deal with terminated employees as well as providing retirement income products for people in retirement, should smaller employers follow suit? Many are concerned about additional work but most record keepers will be more than happy to help as well plan advisors who both generally get paid on assets.
