More 401(k) Plans Want to Keep Retirees' Investments

About three-fourths of large 401(k) plan sponsors would prefer to keep the assets of retired employees in the plan, rather than have retirees roll over their plan assets into an individual retirement account (IRA), according to a recent survey of 47 retirement plan advisory firms.

Asset management firm PIMCO's 2021 U.S. Defined Contribution Consulting Study asked 47 advisory firms, which together serve over 33,000 plan sponsors, approximately what percentage of their clients take the following views on retaining participants' assets in their plan:

• Prefer to retain assets but not actively encouraging retirees to stay as plan participants—38 percent of plan sponsors in 2021, advisors said, up from 32 percent in PIMCO's 2015 survey.
  

• Actively seek to retain retirees' assets—36 percent, up from 14 percent.
  

• Indifferent—19 percent, down from 38 percent.
  

• Prefer to move retiree assets out—7 percent, down from 17 percent.

The 2021 survey was conducted in January and February.

Among the most popular consultant recommendations for plans seeking to hold on to retiree assets were:

• Allow flexibility in income distribution so retirees don't face administrative hurdles when withdrawing funds.
  

• Add retirement education and online tools so retirees can calculate what percent of assets they can withdraw over time without the risk of depleting their funds.
  

• Communicate the value of staying in plan, such as having plan fiduciaries select investment options that are in participants' best interest. Also, if the 401(k) uses institutional-class mutual fund shares, then the fund management fees deducted from participants' accounts will be lower than what IRA holders would otherwise pay for investor-class shares of the same funds.

[Want to learn more about retirement and financial well-being benefits? Join us at the SHRM Annual Conference & Expo 2021, taking place Sept. 9-12 in Las Vegas and virtually.]

Lure of Lifetime Income

"Plan sponsors are changing how they view 401(k)s from what historically had been a vehicle for savings to one that will generate income for participants" during retirement, said Rene Martel, PIMCO's head of retirement services. That change in perspective is leading more plan sponsors to consider adding in-plan annuities to their investment menus. Plan participants invest in the annuity during their working years and then receive guaranteed lifelong payouts through the plan during retirement.

While the use of in-plan annuities, when provided, has been modest to date, proponents argue that the benefits of a guaranteed lifetime income stream similar to that provided by a defined benefit pension could, if properly understood, increase employees' satisfaction with employers during their working years and help ensure them a secure retirement when employment ends.

Participants Express Interest Amid Uncertainty

While PIMCO's survey focused on plan sponsors' views, investment services firm T. Rowe Price asked 3,016 retirement plan participants about their interest in keeping assets in their employer's plan.

While 83 percent of 401(k) participants expressed interest in the idea, Price reported last year, from that group just 30 percent said they currently have plans to keep their savings with their employer, while 53 percent said they would consider keeping their savings in their employer plan if it offered solutions to help generate income during retirement—such as by investing in an in-plan annuity.

Meanwhile, 61 percent of participants said their employers had not communicated the advantages of leaving money in the plan, and many were confused or unaware of their options.

[Related SHRM article: DOL Guidance Focuses on 401(k)-to-IRA Rollover Advice]

Employers had not communicated the advantages of leaving money in the plan.

Retirees' Dollars: Pros and Cons

One of the top reasons plan sponsors may want to keep retirees in their plans is because bigger plans have significantly more leverage to negotiate with financial firms that provide plan services.

Retiree assets remaining invested in the employer's plan, for example, means those plans "have the scale to bring down fees," Lorie Latham, senior defined contribution specialist at T. Rowe Price, told the website PlanSponsor last year.

Perhaps the biggest drawback of keeping retirees' assets, however, is the need to keep track of ex-employees whose money was left in the plan.

In January, the Department of Labor's Employee Benefits Security Administration (EBSA) issued guidance reminding plan fiduciaries of their responsibility to locate and distribute retirement benefits to missing plan participants. According to EBSA, the guidance sought to ensure that "plan participants and beneficiaries receive the retirement benefits that they worked so hard to earn."

Plan sponsors who lose track of retirees, and who fail to make good-faith efforts to locate those missing participants, can be subject to penalties.

"Plan fiduciaries are ultimately responsible for ensuring benefits are paid accurately and timely under the retirement plan," advised Kimberly S. Couch, a partner at law firm Verrill in Portland, Maine.

[Small businesses can find offering a retirement plan to be daunting. SHRM is offering a program through Raymond James that may help. Visit www.shrm.org/401k to learn more.]

Related SHRM Articles:

401(k) 'Windows' Reconsidered as Portals for ESG Investments, SHRM Online, July 2021

State Auto-IRAs May Drive Some Small Businesses to Sponsor Their Own Plans, SHRM Online, July 2021

401(k) Plan Match Formulas, Automatic Features, Add Value for Participants, SHRM Online, July 2021