More plan sponsors increasingly want retirees to stay in 401(k) plans
T. Rowe Price data reveals sponsors’ concern for the best interest of workers, yet also practical interest in scale, reducing fiduciary risk.
A couple of years ago, Lorie Latham, senior defined contribution strategist and a vice president at T. Rowe Price, initiated an outreach program to plan sponsors to see what their feelings were on retiring workers and whether those sponsors wanted them to stay in 401(k) plans after leaving the workforce.
The vast majority indicated they wanted retirees to stay in plan, Latham told BenefitsPRO.
“We were shocked,” she said of her team’s initial findings. An industry veteran, she spent the decade prior to joining T. Rowe on the consulting side. “The question of what to do with retiring workers simply wasn’t on sponsors’ minds.”
That is changing, quickly and decidedly, says Latham, who only expects the trend to increase. Building on the initial outreach, she and her team set out to dig deeper and began to mine sponsors’ perspective on what is motivating their evolving mindset.
Recently, T. Rowe produced data from the latest iteration of its research. Of more than 200 sponsors surveyed, only 17.8 percent would prefer their workers take their 401(k) money when they leave the workforce.
About 40 percent of sponsors said they have a clear preference for keeping retirees in plan.
The data shows a clear delineation between the thinking of sponsors of plans with more than $500 million in assets, and those with less than $500 million in assets.
Among larger plans, half said they prefer money to stay in plan, with only 5.7 percent preferring participants roll over savings to an IRA or take a lump sum.
With the smaller cohort, only about 30 percent said they preferred money to stay, with 28.4 percent preferring money migrate out of the plan–substantially more than in plans with more than 500 million.
Larger sponsors’ interest in scale—the more assets they retain, the greater bargaining power they will have with providers—partially explains their mindset.
But it is likely not their exclusive motivation, said Latham. Smaller sponsors are likely more concerned over their ability to provide the administrative support for separated workers.
Among employers of all sizes, T. Rowe’s data indicates sponsors’ genuine concern for the best interest of their workers. Two-thirds agreed that the fiduciary protections under the Employee Retirement Income Security Act mean retirees are better off leaving money in plan as opposed to rolling it over to an IRA.
And three-fourths agreed that the likelihood of lower investment costs available to money that stays in plan, as opposed to those associated with IRAs, was also reason to encourage money to stay inside 401(k)s.
“By keeping participants in plan, participants are getting fiduciary safe haven,” explained Latham. “Sponsors recognize that, and that’s a positive thing. They care about their workers. They are interested in their employees’ future. We have generous sponsors trying to do the right thing. That shows in the data.”
Fiduciary risk, as expected, is affecting sponsors’ mindset on retaining assets. If assets are to stay in plan, it follows that plans will have to offer some form of an income solution. Nearly 60 percent of all sponsors said adding income features to investment menus invites more fiduciary risk.
Perception is reality, said Latham. But while fiduciary risk is a genuine concern, T. Rowe’s data shows that most sponsors think the risk is worth taking. Only 14 percent said the risk is greater than the potential benefits to participants leaving money in plan.
For larger employers, risk mitigation could be a dividend to retaining assets, which would help allow sponsors to build investment menus at lower costs.
“We know litigation is tied to fees,” said Latham. “Scale is one lever sponsors can look to manage litigation risk. If you can complement your fiduciary need to do what’s in your employees’ best interests and mitigate risk, more power to you. That’s a good thing.”
A troubling grey area
That sponsors’ awareness of their retiring workers’ best interest is growing is hardly disputable.
But T. Rowe’s data also shows many are in limbo over the question of how to guide retirees’ assets.
Nearly 40 percent—roughly equal for plans above and below the $500 million threshold—report having no clear preference as to whether retirees keep money in plan or roll it over.
“They either have not thought about the question, or they’ve thought about it and determined they’re not interested in deciding,” explained Latham. “Either way, that’s troubling.”
That stasis could have consequences for sponsors, warns Latham.
“If you haven’t thought about the question, how can you make some pretty important fiduciary decisions?” she said.
“How do you approach plan documents if you don’t have a post-retirement strategy? How do you engage with your pre-retiree community? And if as a sponsor you are not clear on where you want to be, how can you adequately assess retirement income solutions?” added Latham.
As more sponsors show an interest in keeping money in plan—and helping retirees responsibly draw down savings–more of those sponsors articulating indifference are bound to be nudged.
And that is bound to create an impact on the quality of income solutions offered.
“So many products have hit the market over the past decade trying to solve for retirement income,” said Latham. “Many haven’t had traction and remain on the shelf. But there is greater awareness of what we are trying to solve for—it’s becoming more about a solution, not a product.”
T. Rowe data shows three-quarters of sponsors overwhelmingly support offering a suite of retirement income solutions—systemic withdrawals, managed accounts, stable value funds, bond-laddering strategies, or annuities—instead of one option. T. Rowe Price remains product agnostic, said Latham.
“We are fundamentally in favor of acknowledging the preferences of individuals, and seeing how we can best solve for that,” she said. “We’re not interested in pushing a product. We want to part of the solution.”
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