Retirement – Are your employees prepared for it? 401k and 403b plan sponsors’ top priority is helping their employees accumulate adequate savings for their post-career years. Rightly so — after all, the primary goal of an employer-sponsored plan is fostering retirement readiness. But what happens at retirement, when a plan participant is ready to access the money they’ve saved during their working lives? And how do you, as a plan sponsor, facilitate that?
Why is this important now? The workforce is aging, and 31% of retirement plan assets are held by those age 55-65, according to 2016 data from the Employee Benefits Research Institute (EBRI). Soon, many will be ready to retire and make the shift from the accumulation to the withdrawal phase.
What’s more, since putting money into their retirement plan account was so easy and seamless, retirees expect to withdraw those assets with ease, too. However, the way many retirement plans are currently structured, it isn’t that simple.
At present, about half of defined contribution (DC) retirement plans have specific policies to retain retiree or terminated participant assets. Having such a policy is a good start, according to Callan.
Sure, there are pros and cons to retaining retiree/terminated participant assets in your plan. On the upside, more assets mean greater economies of scale in accessing investment funds, and when negotiating recordkeeping and plan administration fees. However, administering terminated participant accounts can be costly due to logistical issues like tracking down address changes, and may also increase the risk of lawsuits.
Assuming your plan supports asset retention, next review the design. Are there elements that create obstacles to workers leaving money in the plan, such as force-out provisions? Alternatively, are there others that make it easy to leave assets in the plan, like partial vs. full distributions? Does the plan allow participants to consolidate retirement assets, via IRA roll-ins, for example?
On the investment front, there are various options available to help retirement plan participants with capital preservation and asset withdrawals. Conservative may be appropriate for participants nearing retirement, for example, although it’s important to make sure they’re aware of the risks. Brokerage windows can also offer more flexibility, and for that reason, may be attractive to retirees. In-plan and rollover annuities are another option.
Managed accounts are yet another potentially appealing option for plan sponsors who want to offer sophisticated solutions for older participants with more complex financial situations. In addition, to draw down solutions, managed accounts offer retirees the flexibility to set a cadence for withdrawals and develop a portfolio designed to maintain a specific and consistent income level.
Of course, in evaluating all of these different options, it’s important that plan sponsors keep their fiduciary roles in mind. In light of that, confirm your providers, like your record keeper, can support the withdrawal solutions you’re considering. It’s also important to make sure, as always, that participant communications are educational, and can’t be construed as advice. “High-touch” communications such as retirement workshops and even one-on-one sessions with an experienced retirement plan advisor can help participants navigate the complex, and often emotional, financial decision-making process at retirement.
Is your DC plan design optimized to help participants access their assets in retirement? If the answer is “no” or “not quite,” the solutions offered in this article may serve as a good starting point. The ultimate goal is to design a plan that not only helps your participants save for retirement, but provides them the tools they need to create a steady income stream to help them live well once they get there. As a plan sponsor, it’s up to you to help put those tools in place.
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