Sponsors of Larger Plans Are More Likely to Prefer Participants Stay in the DC Plan After Retirement
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.
Even plan sponsors who prefer participants to leave the DC plan at retirement often acknowledged that their DC plan can provide advantages.
“They’re Here…”: Retired Participants Are Already a Reality in Many DC Plans
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.
(Fig. 3) Portion of Participants Who Are Already Retired7
Q: When your employees retire, what would your organization prefer that they do with their DC plan balances?
Although the number of retired participants will vary by plan, it’s often incorrect to assume all participants will leave the plan when they retire. With a significant number of retirees remaining in their DC plans, plan sponsors who have not yet considered how to address their needs should ask themselves: Is this a sustainable and justifiable approach, or is it better to consider the possibility of longer-term involvement?
Plan Sponsors Are Confident Their DC Plans Can Offer Advantages for Retiring Participants
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.
(Fig. 4) Participants are usually better off keeping DC plan balances because of…
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What DC Plan Sponsors Prefer Retiring Participants Do and Why It Matters
1 Previous pulse survey conducted by P&I Content Solutions Group and statistical analysis conducted by Signet Research Inc. in early 2018. Survey population includes 289 corporate, non-profit, and government plan sponsors with assets: 49% less than $500M, 15% between $500M and $1B, 32% between $1B and $15 B, and 4% more than $15B.
2 Results from 191 respondents.
3 Results from 88 respondents.
4 Results from 102 respondents.
5 Pursuant to Internal Revenue Code § 401(a)(31)(B)(ii).
6 RSS4 © 2018 NMG Consulting. All rights reserved. T. Rowe Price engaged NMG Consulting to conduct a national study of 3,005 adults age 21 and older who have never retired and are currently contributing to a 401(k) plan or are eligible to contribute and have a balance of at least $1,000. We also included an oversample of 1,005 adults who have retired with a rollover IRA or left-in-plan 401(k) balance.
7 For “Among all plan sponsors,” results from 165 respondents. For “Among sponsors who prefer participants retain their DC balances,” results from 65 respondents. For “Among sponsors who prefer participants move their DC balances,” results from 29 respondents. For “Among sponsors who have no clear preference or are reconsidering,” results from 63 respondents.
8 Results from 188 respondents.