Should they stay or should they go?
The retirement plan of today, the “defined contribution” plan, is where the contributions going in are defined but the payout (benefit) is not. You amass a pot of money, then… you’re on your own to figure out how to turn that into a paycheck for yourself in retirement. Potentially these plans can serve as accumulation vehicles AND also distribution vehicles, and as American workers age and retire on the 401(k) and other contributory plans, plan sponsors are giving more thought to distributions offered to retired/separated participants.
So what does this all mean and what should plan sponsors be talking about? Read on for our top 3.
1. Do you want terminated/retired participants to stay in the plan?
In the immortal words of the 1981 philosophers better known as Clash:
Should I stay or should I go now?
If I go, there will be trouble
And if I stay it will be double
So come on and let me know
There are arguments both ways:
Stay: The assets help the total buying power of the plan in getting lower fees.
Go: HR departments are not equipped to counsel separated participants that may not fully understand their benefits or those with diseases associated with old age, such as dementia.
Stay: The plan allows participants access to lower cost accounts and institutional investments.
Go: People often forget to update their personal information when they move, or to update beneficiaries when life changes. This leaves the HR department with the liability to locate these people or their beneficiaries.
But there is interest in working longer both from a “needs” and “wants” perspective. The Bureau of Labor Statistics, Employment Projections Tables 3.2 and 3.3 show the percent of people in the labor force from 1996 forward projected to 2026 increasing in the number of workers age 65 and older. The 2017 Retirement Confidence Survey sheds light on why:
Almost all retirees who worked for pay in retirement gave a positive reason for doing so, saying they continue to work because they want to stay active and involved (90 percent), they enjoy working (82 percent), or a job opportunity came along (47 percent). However, they reported that financial reasons also played a role in that decision, such as wanting money to buy extras (67 percent), needing money to make ends meet (42 percent), a decrease in the value of their savings or investments (23 percent), or keeping health insurance or other benefits (13 percent).
2. If encouraging them to stay, is your investment lineup equipped to handle that?
Retirement plan menus should be built to accommodate everyone at any point in their career. Since most of the population is focused on growth and accumulation, that is where the menus tend to be slanted. If you encourage retired participants to stay, the menu will need to be tweaked to include an array of investments centered on capital preservation and income. Several investment firms have designed or are designing investment products to facilitate the distribution of income. Additionally, many recordkeepers have products with a qualified longevity annuity contract or some version of a variable annuity with a guaranteed payout that could be appropriate for retirees in the plan.
3. Is your plan design equipped to handle it?
Cerulli Associates in partnership with the SPARK Institute surveyed plans in 2017 to find the frequency of distribution options offered to retired/separated participants. One-time lump sum, paid in cash payments was the most frequently offered option (100% of the time). Systematic non-guaranteed withdrawals (e.g. monthly or quarterly remittance), ad hoc withdrawals, and one-time lump sum converted to guaranteed monthly or quarterly payments were offered less than half the time. Plan sponsors who want to encourage retired participants to stay should consider which types of distributions are allowed by the plan and what kind of administrative burden will accompany them.
Wrapping up, review your employee demographics and ask, are we reaching everyone? Retirement plans really need to a be a one-size-fits-all. Whether you’re encouraging retired/terminated participants to stay or go, make sure your plan is built to fit and built to last.
If these are conversations that you are having or are contemplating, reach out and let us walk you through the trends we’re seeing!