Plan sponsors fight to retain assets of departing workers

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As people leave their jobs or retire, that doesn’t mean they are taking their retirement assets with them via a cashout or a rollover IRA.

In fact, plan sponsors have been offering multiple incentives via plan design changes to retain those assets — practices that were enacted long before the so-called Great Resignation, the period of job turnover and retirement prompted by the coronavirus pandemic.

“Efforts to retain assets in plan has been building for some time,” said Joshua Dietch, vice president and head of retirement thought leadership for T. Rowe Price Group Inc., Baltimore. The reasons include “a desire to maintain scale of assets to offer lower-cost investments to both active and separated plan participants (and) a sense of obligation to former employees to offer fiduciary oversight they otherwise might not receive if the money were simply rolled over to an IRA.”

There’s also peer pressure because “other competitors were doing it and increasingly, it is viewed as a best practice,” said Mr. Dietch, adding that “over the past few years, we’ve continued to see the assets retained continue to creep up each year.”

Even though the IRA business is the biggest source of retirement money, some research suggests that rollovers aren’t gaining at the expense of the DC plans in recent years, at least in terms of assets.

According to research by Cerulli Associates, Boston, among the $3.27 trillion in assets qualifying for a penalty-free distribution in DC plans last year, $2.39 trillion (73%) stayed in employers’ plans while $709 billion (21.6%) was rolled over into an IRA. Cashouts and money rolled into another DC plan accounted for the rest.

The stay-in-plan percentage was 69% in 2020 and 66.5% in 2019. It was 70.5% in 2018 and 68.5% in 2017. During the corresponding periods, the percentage of IRA rollover assets was 23.3% in 2020 vs. 25.4% in 2019, 24.1% in 2018 and 25.1% in 2017. The Cerulli data is based on information from several government, private and independent research sources as well as Cerulli proprietary databases.

“We can’t say for certain” why stay-in-plan assets have risen in recent years, said Cerulli’s Boston-based senior analyst David Kennedy. “But there was a notable jump in retirement-income options offered among 401(k) record keepers in 2020. That seemed to be the first year we saw more widespread adoption of these practices (retirement-income options) in the retirement market.”

Annual research by Vanguard Group Inc. of its record-kept clients showed the percentage of participants keeping their retirement assets in their plans remained essentially steady, usually in a range of 67% to 69% between 2012 and 2021, based on participants who were eligible for distributions in the specific year or in prior years.

The percentage of participants taking rollovers has remained steady, too, with a range of 12% to 14% during this period, according to the most recent Vanguard research report published in June. The percentage of participants taking a cash lump sum ranged between 14% and 19%.

However, when measuring plan assets, Vanguard’s analysis showed an almost steady increase in retirement assets remaining in plans — 81% in 2021 vs. 75% in 2012. At the same time, the rollover assets declined to 16% from 20% during this period. Cashouts hovered between 1% to 3% of assets during this period.

This data indicate that the smallest accounts are the most likely to be cashed out. Balances of less than $1,000 are usually cashed out by an employer unless an employer allows the money to remain in the plan. Plan balances between $1,000 and $5,000 are “generally rolled over automatically to an IRA unless a participant elects otherwise,” although some sponsors may allow balances of more than $1,000 to remain in the plan, said the Vanguard report. “Most plans have adopted these provisions.”

Changes in plan designs and in sponsors’ attitudes making DC plans “more retirement-friendly” are giving participants’ more reasons to eschew — or at least delay — IRA rollovers, said David Stinnett, principal and head of strategic retirement consulting at Malvern, Pa.-based Vanguard Group.

“We have seen an uptick in plan sponsor focus on retention of participant assets in the plan,” said Mr. Stinnett, citing the trend in sponsors’ fee-cutting over the years as well as their making plans “more flexible for retirees, such as adding advice and retirement-income solutions.”

Among participants in Vanguard record-kept plans, 72% can take ad hoc partial distributions after they leave and 80% can set up installments. “These percentages are up from 41% and 70% respectively” from 2016, he said. “Our research shows that when these types of flexible withdrawal options are offered, participants are more likely to remain in the plan.”

Demographics also plays a role. “More workers are retiring from 401(k) plans than in the past and they have balances that have benefited from being one of the first generations to have invested in a 401(k) for almost their whole work life,” he said. “Keeping these balances in the plan allows for economies of scale.”

Vanguard tells people “to look at the fees, the different services and the greater financial wellness” features of institutional plans vs. retail IRAs, Mr. Stinnett said. “We encourage people to compare and contrast.”

Comparing fees was the theme in a June 30 report by The Pew Charitable Trusts, citing fee differences between institutional shares available in DC plans and retail-priced shares in IRAs. “Even small disparities in fees can lead to big reductions in savings,” said John Scott, director of Pew’s retirement savings project, during a media briefing about the study.

Mr. Scott also pointed out that in-plan investment fees can be higher than rollover IRA fees. “The rollover is not the problem,” he said. “It’s really understanding what the fees are when you make that rollover.”

Comparing fees may be one reason people who retire or take another job don’t necessarily act quickly to take a distribution from their DC plan .

“For many, it may not be an urgent decision,” said Nathan Voris, the Richfield, Ohio-based director of investment insights and consultant services for Charles Schwab Retirement Plan Services.

“For someone transitioning to a new employer and maybe relocating, for example, they know they can make a rollover decision later, and other work/life decisions may take priority,” he said. “For someone newly retired, they know their assets are safe in the workplace plan and they may be taking some time, either on their own or with the help of an adviser, to develop a long-term financial plan, including a decision on whether and when to roll plan assets into an IRA.”

Mr. Voris said a combination of “paternalism, product development and legislation” have contributed to greater keep-the-assets-in-the-plan efforts. “The industry has been focusing on in-plan income solutions broadly, and the SECURE Act gave employers greater flexibility to add in-plan annuity solutions,” he said. Sponsors “understand that for retirees to stay in the plan, it needs to offer appropriate investment choices for them and an effective distribution structure for them to draw a retirement paycheck.”

Amid sponsors’ asset-retention efforts, IRAs remain the largest retirement market. With an estimated $13.2 trillion in assets for the first quarter of 2022, it stood well ahead of the second-place defined contribution plans at $10.4 trillion, according to data compiled by the Investment Company Institute, Washington, from several government and industry sources. Government defined benefit plans ($7.9 trillion), private-sector defined benefit plans ($3.6 trillion) and annuity reserves ($2.4 trillion) represented the rest of the $37.5 trillion in retirement assets for the first quarter of 2022, said an ICI report issued June 15.

Sarah Holden, the ICI’s Washington-based senior director for retirement investment research, noted the institute’s quarterly and annual surveys of retirement assets don’t distinguish between an IRA rollover from a DC plan or from a DB plan.

Deciding on a rollover “is a very individual decision,” said Ms. Holden. “Do I want to consolidate (other accounts)? Do I work with an adviser?”

She pointed to other ICI research, published in January 2022, that shows the primary reason (25% of responses) for choosing a rollover last year to a traditional IRA is that participants didn’t want to leave their money with former employers. (The survey excluded Roth IRAs and employer-sponsored IRAs.)

Among the other top reasons were consolidating retirement assets (22%), wanting more investment choices (13%), wanting to keep the assets with the same financial services provider (11%) and seeking to preserve the tax treatment of savings (11%) as opposed to cashing out.

Of 10 choices in the ICI survey, 6% said the primary reason for choosing a rollover was the recommendation by an adviser.

The ICI survey also found that when participants conducted research about IRA rollovers their advisers were the major source of information (52% of responses), followed by finance services firms’ printed, web, seminars or phone call information (20%), and employer’s information via print, online and seminars (11%).

Cerulli Associates found that among retired participants doing an IRA rollover, financial advisers (36% of responses) represented the most common reason for their decision, followed by a desire for more investment options (23%) and strategy for consolidating assets into an existing IRA (20%).