What DC Plan Sponsors Prefer Retiring Participants Do and Why It Matters

Q: When your employees retire, what would your organization prefer that they do with their DC plan balances?²

More than 39% of plan sponsors prefer that participants keep their DC assets in plan after retirement. Only 17.8% of plan sponsors preferred that participants exit the plan upon retirement (e.g., rolling over balances to an IRA, taking a lumpsum distribution, etc.).

Further, 5.8% of plan sponsors reported that they were reconsidering their position regarding retention of retiring participants, signaling that the positions of some plan sponsors are in flux. More interestingly, a large segment of plan sponsors reported “no clear preference” (37.2%) on the issue. This should not necessarily be interpreted as simple indifference in all cases. Many plan sponsors seem open to both options—support for participants who choose to exit the plan as well as for participants to remain in their DC plans. The views of plan sponsors in this group may skew more to principled neutrality rather than simple ambivalence.

Overall, these findings may reflect an evolution of thought among plan sponsors. Rather than simply focusing on the needs of current employees, many plan sponsors appear increasingly open to supporting the needs of participants over longer time frames, including periods after retirement.

Q: When your employees retire, what would your organization prefer that they do with their DC plan balances?

Our data demonstrate a clear discrepancy between the retention preferences of sponsors of larger plans (assets of $500M or greater) and sponsors of smaller plans (assets less than $500M). Sponsors of larger plans are much more likely to favor retaining retiring participants in plan. Plan size—in and of itself—is probably not the direct cause. Smaller employers may simply be more concerned about their ability to provide administrative support for relatively large pools of retired participants over time.

The preferences of larger plan sponsors can have a more deterministic effect on DC plan service providers and asset managers, driving product and feature development that can downstream to smaller plans. The broad effect on the DC marketplace may be increased availability of more effective and efficient features, solutions, and resources intended for retired participants in the future.

Plan sponsor preferences aside, a substantial percentage of the plan participant base may already be retired in many plans. Plan sponsors typically only force a participant out via mandatory distribution upon termination of employment if the account balance is less than $5,000.⁵ In reality, nearly all plans will carry a population of former employees (retired or otherwise).

However, the percentage of retired participants (14.3% average) reported within our research sample suggests that some are inclined to remain within the DC plan beyond a short transitional period after separating from service. Separate research from T. Rowe Price on a more expansive sample of DC plan participants adds broader context. Forty-five percent of DC plan participants who separated from service (retired or otherwise) left balances in a prior employer’s plan or consolidated it within the plan of a new employer; only 38% elected to roll over DC plan balances to an IRA.⁶ In other words, participants more often chose to keep accumulated balances within the DC system than not.

Q: When your employees retire, what would your organization prefer that they do with their DC plan balances?

An individual participant’s decision to stay in plan or roll over assets to an IRA can be complicated and based on several factors. However, there are two common reasons why remaining within a DC plan may be appealing.

First, the large scale of DC plans offers the advantage of institutional pricing and potentially lower overall investment costs compared with an IRA. Second, the Employee Retirement Income Security Act (ERISA) requires the application of rigorous standards and oversight within DC plans under its jurisdiction, whereas an individual may or may not receive this same standard of care outside of the plan.

Within our research, most plan sponsors agreed that participants are better off keeping their DC plan balances in plan because of ongoing fiduciary oversight provided within the plan and the likelihood of lower investment management costs.

What DC Plan Sponsors Prefer Retiring Participants Do and Why It Matters