Robust Retirement Tiers Can Help Keep Participants In-Plan

Workplace retirement plans may need to change their name—these days, more plan sponsors are looking for ways to serve their former employees even after they’ve quit working.

Research released by Cerulli Associates last month showed that more than half of plan sponsors (54%) would prefer to keep their retired participants’ assets in their plan, rather than seeing them rolled into an individual retirement account or other plan. That’s more than double the 26% who said the same in 2019.

But plan sponsors will need to do some work to succeed in that goal.

“It’s one thing to say you want to keep participants post-retirement,” says Tim Pitney, managing director of institutional investments at TIAA. “It’s another thing to design your plan in such a way that gives participants a reason to stay.”

Still, Bill Ryan, partner and head of defined contribution solutions at NEPC, says most plans already have the basic tools—the ability to make systematic withdrawals and investment options that can support near-term goals—necessary to serve their retirees.

“The retirement tier is an overwhelming topic that doesn’t have to be overwhelming,” Ryan explains. “We are closer to the answer than further away. Most plans have the building blocks for a retirement income tier; they just have to build on them.”

Beyond the Basics

For a more robust retirement tier, experts say plan sponsors should focus on communicating with retired participants about how to make the most of existing offerings—and take the time to thoughtfully consider whether there are other products available that would strengthen their offerings to these participants.

“You have to have the right accumulation vehicles, but you also need the right decumulation vehicles if you want retirees to remain in the plan,” Pitney says.

When it comes to investments for retirees, some plan sponsors are re-evaluating target-date funds to make sure they have a glide path that helps participants move through—rather than to—retirement, or the ability to switch to a managed account when participants reach retirement age, says Scott Mayland, an ERISA fiduciary and retirement services counsel at Groom Law Group.

The Setting Every Community Up for Retirement Act of 2019 and the SECURE 2.0 Act of 2022 eased some restrictions on in-plan annuities. Those regulatory changes, along with higher interest rates, have more plan sponsors also looking at lifetime income products to enhance their retirement tier offerings.

“More lifetime income options are being made available, and they’re being made available in different forms,” Mayland says. “Some are integrated into target-date funds, some are separate. That’s certainly a way to make the plan an attractive option for participants.”

Mayland says plan sponsors considering adding annuities must evaluate them with a fiduciary’s eye, making sure they understand all the features and the costs. Ryan says a simple way for plans to get started with annuities might be through a window that allows participants to select from a range of providers. For plan sponsors looking to add an annuity to the investment menu, a straightforward, plain-vanilla fixed annuity is likely the best approach for the widest demographic, he adds.

Rising RMDs, Expanding Roths

Another SECURE 2.0 feature—the delayed date of the first required minimum distribution (RMD) to age 73 this year and age 75 in 2033—could be a further incentive for plan sponsors to consider annuities.

“There’s always a challenge with the coordination of RMD rules when an individual has multiple accounts at different financial institutions,” Mayland says. “SECURE 2.0 lessens the burden somewhat in terms of coordinating those accounts and determining the appropriate payout. That can make it a little easier to offer annuity options either in or outside of the plan.”

The expansion of in-plan Roth accounts that will occur as additional SECURE 2.0 provisions go into place may further strengthen the case for a retirement tier.

“There is going to be an unintentional benefit from that long-term, because this group won’t need to take RMDs, and they may leave their money in longer,” Ryan says.

The Role of Communication

Along with appropriate investment solutions and income products, plan sponsors must also think about educating retirees on how to make the most of their retirement accounts.

“It’s such a critical point—when people get to retirement after 20 years or 30 years of accumulating assets—where they need to pivot and learn how to structure their plan and take the right level of income that will last through the rest of their life,” Pitney says. “Having advice, whether it is through a recordkeeper or the [plan sponsor’s] own services, is probably one of the most important elements of the plan for retirees.”

But while there are advantages to keeping retirees in-plan, including retirees having access to better pricing, there are also some drawbacks plan sponsors should keep in mind: namely, the challenges and costs associated with keeping track of participants after they have separated from a company, says Jonathan Zimmerman, a partner in Morgan, Lewis & Bockius LLP.

“The Labor Department has focused heavily on missing participants in the past seven or eight years, so fiduciaries are under a lot of pressure to make sure everyone in the plan gets paid,” Zimmerman says. “It requires effort and expense, and that adds up over time.”

Plans building out a retirement tier should therefore make sure they also have a strategy aimed at keeping in contact with retirees and making sure they remain engaged with the plan.

“If you are offering additional products and changing the plan to offer those products, you’d have the same obligation to communicate those changes to former employees,” Zimmerman says.