Plan Sponsors Recognizing Need for Decumulation Choices

After years of focusing on helping employees accumulate savings in their defined contribution (DC) retirement plans, there is now increasing focus by plan sponsors on retirement readiness—usually by measuring and informing participants about how much income they will be able to replace in retirement.

However, DC plan participants still don’t understand how to draw down their savings during retirement. The second quarter 2018 issue of The Cerulli Edge – U.S. Retirement Edition presented results of a survey which found participants age 45 and older were “generally clueless” as to what they will do with their accumulated savings. Jessica Sclafani, director at Cerulli, said that fully one-quarter of respondents explicitly answered, “I don’t know what I will do with my 401(k) account savings.” And another one-quarter say they “will ask my existing financial adviser for advice.”

Sclafani suggested the latter data point can be read as “a marginally more prepared version of I don’t know.” Thus, the survey seems to suggest that at least half of 401(k) plan participants have no idea what to do with the savings they have diligently set aside for retirement.

The good news is that a recent Willis Towers Watson survey 30% of employers say have adopted one or more lifetime income solutions, up from 23% in 2016. The most common is systematic withdrawals (80%), followed by lifetime education and planning tools (70%) and in-plan managed account services (44%).

A new survey from Alight Solutions also indicates more employers are expanding distribution options in their DC retirement plans to help employees with draw down strategies in retirement. According to its 2019 Trends & Experience in DC Plan Survey, in 2019, all plan sponsors offered lump-sum distributions. However, 78% offered partial distributions, up from 69% last year and from 43% in 2005. In addition, 75% offer installment payments, up from 66% last year and 50% in 2005.

The average percentage of participants who took lump-sums was 75% in 2019, down from 79% in 2018, and down from 86% in 2005. One-quarter of participants took partial distributions, the same as last year, but up from 21% in 2005. Thirteen percent elected for installment payments, up from 8% in 2018.

The survey has been conducted every two years since 1991. The 2019 survey was completed by 240 employers across a variety of plan types, sizes and industries. For purposes of the survey, DC plans include 401(k), 403(b), 401(a) and 457 plans.

A survey from Alight Solutions earlier this year also found the offering of installment payments encourages more retirees to keep their assets in DC plans. Doing so means they benefit from professional investment management and usually lower costs.

While it is encouraging that employers are increasingly offering in-plan withdrawal strategies to support lifetime income, employees need to first understand spending needs in retirement to create a draw down strategy.