Data and Research March 14, 2019

Installment Payments Encourage More Retirees to Keep Assets in DC Plans

Over the past decade, overall, there was a higher percentage of withdrawals among people who terminated employment after reaching age 60 than other age groups, Alight Solutions says.

Reported by

Citing MetLife’s Lifetime Income Poll, Alight Solutions says that in 2012, only 9% of employers agreed with the statement, “The sole purpose of the DC [defined contribution] plan is to serve as a source of retirement income.” By 2016, this had jumped to 85% of employers.

This prompted Alight Solutions to study what workers do with their assets once they retire. Among participants who terminated in the past 10 years, 40% of assets remained in the plan as of year-end 2017, but because people with smaller balances were more likely to cash out, only 26% of people who terminated in the past 10 years remained in the plan as of the end of 2017. Forty percent cashed out, 8% did a combination of the two and 26% rolled their money into an IRA.

Participants who were age 60 or older when they retired were more likely to keep assets in the plan if it permitted installment payments. Alight Solutions’ recordkeeping platform had higher asset retention than other recordkeepers, with only 10% of people on its platform rolling their money over to an individual retirement account (IRA) versus 25% across the industry. Alight attributes this to its not offering IRAs.

Alight also says the IRA rollover market is highly competitive and crowded. Thus, no single IRA provider received a large percentage of rollovers. Alight says 5,000 different IRA providers have received IRA rollovers in the past 10 years.

Alight says employers carefully monitor how money leaves their DC plan for several reasons, the first being concern that a 401(k) recordkeeper could prompt participants to roll over their assets from the low-cost DC plan, subject to fiduciary duties, into a higher-cost IRA. Employers are also keenly aware that if they retain retirees’ assets, the size of the plan is higher and, thus, they have more bargaining power with respect to service providers’ fees.

Employers also know that workers who retire from their company with DC balances would be better served with lower fees and the protection of being invested in a plan subject to the Employee Retirement Income Security Act (ERISA), Alight says.

In terms of the assets of individuals who terminated between 2008 and 2017, as of year-end 2017, 40% of assets remained in the plan, 15% were cashed out and 45% were rolled over.

“The discrepancy between the headcount and the asset weighting arises from two primary facts,” Alight says in its report, “What do workers do with their savings after they leave their employers?”

“First, people with small balances were more likely to cash out their benefits than people with large balances,” Alight says. “Eighty percent of people with balances of less than $1,000 cashed out their entire balances, compared to only 2% of people with balances of $250,000 or more. Second, there are many more people with small balances than large ones. Individuals with balances of $1,000 or less outnumbered those with balances of $250,000 or more by a factor of more than three to one.”

In the past decade, within a year of termination, 55% to 60% of people took a withdrawal, either through a cash-out or a rollover. In the following year, another 15% took action. “Assets leaving the plan followed a similar pattern,” Alight says. “Most of the withdrawals took place within the first few years following termination, but slowed down and leveled off after about five years.”

Overall, there was a higher percentage of withdrawals among people who terminated employment after reaching age 60 than other age groups, Alight says. Thirty-eight percent of people who terminated after reaching age 60 and who had a balance of at least $250,000 kept their money in the plan when installments were offered. When installments were not offered, only 28% of people kept their money in the plan.

Alight says that in 2017, two-thirds of plans offered installment withdrawals up from 51% in 2007. However, only 3% to 6% of people who terminated after age 60 chose an installment payment. Cash distributions and withdrawals are much more common.

Alight recommends that employers monitor how much money from their plans goes into IRA, and that they educate participants about their retirement plan choices, particularly discouraging younger workers who leave for other jobs from cashing out. Finally, Alight says employers should begin to embrace lifetime income options, starting with installment payments.

Alight’s full report can be downloaded here.
Investing March 14, 2019

Cerulli Foresees Increased Use of Managed Accounts in DC Plans

“Growing emphasis on financial wellness, concerns about lack of retirement income options within employer-sponsored plans, increasing customization for the participant, and fiduciary concerns could spur additional growth in managed accounts,” Cerulli contends.

Reported by

Several trends in the defined contribution (DC) retirement plan market are likely to propel a greater interest in managed accounts, Cerulli Associates says in The Cerulli Edge―U.S. Retirement Edition, 1Q 2019 issue.

“Growing emphasis on financial wellness, concerns about lack of retirement income options within employer-sponsored plans, increasing customization for the participant, and fiduciary concerns could spur additional growth in managed accounts,” Cerulli contends.

Get more!  Sign up for PLANSPONSOR newsletters.

According to Cerulli, the managed account category within DC plans experienced robust growth in recent years, with total assets more than doubling from $108 billion in 2012 to $271 billion in 2017. DC managed account assets include those in which the managed account solution is a plan’s designated qualified default investment alternative (QDIA), and where it is offered as an option on the plan menu. Target-date funds (TDFS) capture the majority of QDIA flows, and Cerulli does not expect this dynamic to change during the next several years. Rather, Cerulli believes managed accounts will continue to gather assets as a customized solution for a targeted cohort of a plan’s overall participant population.

Cerulli estimates there are nearly 20.8 million households ages 45 to 69 with between $100,000 and $2 million in investable assets. For this cohort, close to 60% of their investable assets are in retirement savings. This segment captures what Cerulli considers to be the most relevant cohort of investors for a managed account program. As participants age or achieve greater account balances, their tolerance skews toward protecting accumulated assets, which may require greater customization than that of a TDF.

With the corporate DC market in negative net flows, some plan sponsors and intermediaries seek investment solutions that can better position the workplace savings plan as a decumulation vehicle, Cerulli notes. For plan sponsors that seek to retain the assets of retired/separated participants, there must be an in-plan retirement income solution available. As one of the largest managed account providers notes, “Plan sponsors are looking for an end-to-end, solution for participants,” or, a single portfolio solution that can guide them through accumulation and decumulation. Managed account programs typically have an advice component that becomes crucial in decumulation. Given the increased complexity of the decumulation stage, participants can benefit from access to advice, and this access is an important part of managed accounts’ value proposition. Data from a 2018 Cerulli survey of 800 401(k) plan sponsors shows that nearly 40% of plans that currently offer managed accounts do so because they “help participants with retirement income.”

In addition, Cerulli says the increasing interest among 401(k) plan sponsors in encouraging and promoting financial wellness aligns with the more individualized and holistic mandate of a managed account. Financial wellness emphasizes holistic advice and goes beyond a participant’s workplace retirement savings account, and one of the primary benefits of a managed account solution is its ability to reflect a more comprehensive and customized view of an individual’s financial picture and consider non-retirement assets.

Considerations for managed accounts

The largest managed account providers act in a fiduciary capacity regarding the managed account; however, Cerulli warns, one should not assume that all managed account providers take on the role of an Employee Retirement Income Security Act (ERISA) 3(38) fiduciary. “This is particularly important to remember when reviewing some of the newer hybrid target-date/managed account products that have been brought to market,” Cerulli says. It reminds plan sponsors that they retain the duty to monitor the managed account provider.

In addition, 401(k) plan sponsors are keenly aware of cost and can hesitate to offer participants what appears to be an expensive option relative to other investments. Cerulli reminds plan sponsors that ERISA urges plan fiduciaries to assess fees in terms of the value of the services provided. From this perspective, it can be argued that while managed accounts are generally more expensive when solely comparing fees, they provide additional services for participants, and, therefore, could offer greater value for the fee.

More information about this topic can be found in The Cerulli Edge―U.S. Retirement Edition, 1Q 2019 issue, which may be ordered from here.

«