The shift from defined benefit to defined contribution plans has placed shared burdens on the employee and employer to solve for retirement income. That means there is ample opportunity for plan sponsors and financial professionals to help participants make better choices.
Even though plan sponsors have tried to educate, research has shown that a large number of Americans still lack basic financial literacy, which affects their retirement planning.1
So introducing a plethora of complicated financial products and strategies to them at a time when they are most concerned about not making a financial mistake only increases their financial stress, which is counterproductive.
1 in 4 preretirees were not sure if they would invest in an annuity or managed payout fund or if they should manage their money on their own.
We asked preretirees age 50 and older about how they would allocate a hypothetical amount of retirement savings ($500,000) at retirement across four options:
More than eight in 10 preretirees have a goal to manage a strategy that converts their assets into an income stream in retirement. In simpler terms, they want to create a paycheck from their own savings. But when asked about individual retirement income solutions like a managed payout fund, an immediate annuity, or a deferred annuity that would meet that goal, the majority of preretirees say they are either not sure or won’t put any money in these choices.
So while the desire to create a paycheck is there, the appeal of individual retirement solutions is low—this is the gap that needs to be bridged.
Our research also shows that there is more openness to a managed payout solution or annuity among younger preretirees who are further from retirement. However, when retirement is just around the corner, preferences change. A couple of factors may be at play here:
This need for advice is more apparent when we see that the interest in working with a financial professional, or managing one's finances entirely, more than doubled from 11% for the age 50–54 age group to 25% among those in the age 60–64 age group:
We know from other research T. Rowe Price has done that plan sponsors are open to retirees leaving their assets in their employer’s plan. In fact, half of plans with assets greater than $500 million prefer that participants maintain their balances in DC plans.2 But do participants feel the same way?
Eighty-three percent of all 401(k) participants want to keep their savings in the employer plan after retirement. Breaking that down:
While the desire to keep the assets in the plans might be known in institutional circles, employers are not necessarily conveying that message successfully to their plan participants. Sixty-one percent of participants say their employers have not communicated the advantages (like lower investment cost or ongoing professional oversight) of leaving the money in the plan.
Interest Spans the Generations
Participants of all ages expressed interest in keeping assets in the 401(k) plan:
Individuals want more than a one-dimensional product. They need help with selection and planning, so how the solutions are delivered is as crucial as the solutions themselves.
Plan sponsors and financial professionals have an opportunity to take the lead and help participants make better retirement income choices by providing participants with a variety of retirement income solutions and the right tools and education to make the necessary choices.
The Retirement Savings and Spending Study was conducted by NMG Consulting and included a sample of 3,016 retirement plan participants, 250 eligible non-plan participants, and 603 individuals without access to workplace savings plans. It also included 1,005 retirees who have retired with a rollover IRA or left-in-plan 401(k) balance. The survey was conducted online from June 13–25, 2019.
1 Lusardi, Annamaria and Mitchell, Olivia S., “Financial literacy and retirement planning in the United States,” Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(04), pages 509–525, October 2011.
2 “What DC Plan Sponsors Prefer Retiring Participants Do and Why It Matters,” Latham, Lorie, T. Rowe Price, February 2019.
Contact your T. Rowe Price representative to find out how we can take your plan to the next level.