Retirees Stay in 401k Plans

Presentation…And it is beneficial if the employer is considering offering guaranteed income products inside their retirement plans.

According to J.P. Morgan Asset Management’s 2018-2019 Retirement by Numbers research report, 42% of participants remained in their DC plans three years after retiring.  This report was recently cited in Think Advisor.  That’s more than double the figure from 10 years ago.  In addition, J.P. Morgan researchers found that account balances tend to be higher on average for those who remain in DC plans – $156,000 vs. $91,000.  In addition, retirees who remained in the plan had higher average beginning account balances.  They were higher earners than those who do rollovers once they retire, according to the research.  Interestingly, this is contrary to the belief that those with higher account balances would roll over their assets once they retired.

As recently as 2016, around 45% of retirees stay in 401(k)/DC plans for one year after retiring, according to research from T. Rowe Price.  In 2019, that figure increased to 55%.  Around 45% of participants two years into retirement kept assets in the plan in 2018, and 35-40% did so three years into retirement.  Also according to T. Rowe Price, more participants are interested in keeping their assets in their 401(k) plan if appropriate retirement income products are available.  In a survey of 2,000 investors, T. Rowe Price found that 70% of baby boomers would keep assets in a workplace retirement plan, as well as 76% of Gen Xers and 80% of millennials.  However, T. Rowe Price data also shows that just 10% to 20% of DC plans currently have a retirement product in them, so there is still ample room for growth in this arena.

What’s behind this trend?  Think Advisor listed the following drivers, from T. Rowe Price:

  • Consultants who serve as advisors to $4 trillion in DC plans say they are focusing on in-plan retirement income products.
  • The landmark Setting Every Community Up for a Retirement Enhancement (SECURE) Act, passed in late 2019, has resulted in more money going into DC plans.  Additional regulation has also made more advisors fiduciaries, meaning they can advise on retirement plan accounts.  A caveat for plan sponsors: make sure your advisor is sufficiently positioned to handle large accounts, or that they have the ability to grow with your plan as assets increase.
  • Consolidation among retirement and wealth firms has created more opportunities to offer advice in DC plans, which was not the case before.  Previously, wealth advisors would work to get participants to roll assets out of retirement plans, whereas plan advisors would focus on retaining those assets.  The consolidation means growing numbers of advisors are now focused on both aspects, creating additional opportunities to retain assets inside of DC plans.
  • Plan participants are also recognizing the advantages of keeping their assets in the plan, including the dual benefits of institutional advice and lower costs.
  • Plan sponsors were reluctant to have participants remain in the plan after retirement because it opened them up to fiduciary risk and potential lawsuits due to benefits, rights, and features clauses that hindered the ability to develop specialized products for retired participants.  However, that is no longer the case, as recordkeepers are creating pathways to facilitate regular account withdrawals and other issues of concern.  While the risk of lawsuits still exists, the development of specialized retirement products is helping to mitigate that risk.  In addition, distribution fees have largely gone away, according to T. Rowe Price.

While in-plan retirement income products are still very much in their infancy, there is ample opportunity for plan sponsors to help retirees stay in 401(k) plans.  It will take time to iron out the kinks, but offering retirement income products in your plan may be an option worthy of consideration.

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