Trendspotter: 401(k) participants are staying in plans after retirement

The trend

A growing number of retirees are leaving their savings in defined contribution plans — mainly 401(k)s — after they have stopped working instead of rolling them over into an outside account.

The trend is meaningful for advisors who are fiduciaries and have a potential new pool of client assets to guide. For advisors who charge fees based on assets under management, it raises questions on compensation and conflict of interest, retirement researchers say.

Indeed, 42% of participants had remained in their DC plans three years after retiring, which is more than double the number from 10 years ago, according to J.P. Morgan Asset Management’s 2018-2019 Retirement by Numbers research report.

The researchers also found those who stay in DC plans have higher account balances — on average, $156,000 versus $91,000 — and had a higher average beginning account balance and were higher earners than those who do rollovers once retiring.

This seems “counterintuitive,” said Katherine Roy, managing director and chief retirement strategist at J.P. Morgan Asset Management, as it was thought that those with higher balances would be those who rolled their accounts over.

In 2016, about 45% of participants kept money in their DC plans for a year after retirement, according to T. Rowe Price. That jumped to 55% in 2019. As of 2018, 45% of participants two years into retirement kept their assets in the plans, while 35%-40% of participants did so three years into retirement.

The trend is visible, even if at the leading edge. When 2,000 investors were asked if they were interested in keeping money in their 401(k) plan if there were appropriate retirement products, 70% of baby boomers said yes, along with 76% of Generation Xers and 80% of millennials, explained Michael Doshier, T. Rowe Price’s lead retirement strategist.

He won’t say they are at a “tipping point” for this movement: The data shows that only 10% to 20% of DC plans have deployed a retirement income product within them, “so there’s still a product gap there,” Doshier said.

The drivers

• Consultants who advise some $4 trillion in DC plans say they are focusing on retirement income products in plans, T. Rowe Price found.
• The passage of the Setting Every Community Up for Retirement Enhancement (Secure) Act is pushing more money into DC plans. Also, increasing regulation has pushed more advisors to become fiduciaries, which means they can advise on retirement plan accounts.
• Convergence, or the large crossover where retirement firms have been acquiring wealth firms and vice versa, has been growing. Where there was a lack of retirement advice in DC plans, that is changing. Advisors on the wealth side have historically tried to get that DC money to roll over while advisors on the plan side want it to stay. Due to this M&A crossover, however, “more advisors are playing both sides of that coin,” Doshier says.
• Plan participants also see advantages of staying in a DC plan, largely that they get institutional advice and lower costs.
• Plan sponsors weren’t as eager to hold on to participants after retirement as they weren’t set up for decumulation and potentially faced lawsuits due to benefits, rights and features clauses that held them back from developing specialized products for retired participants. Today, that is changing. Recordkeepers are smoothing out issues such as regular withdrawals from accounts. Although the risk of lawsuits is still there, there is more development of specialized retirement products. In addition, many of the fees on distributions have gone away, according to Doshier.

The buzz

Michael Doshier, lead retirement strategist, T. Rowe Price:

There’s clearly still a challenge [for advisors] to being able to reach into plans and advise on those assets and get compensated. We haven’t ironed all this out.

If you’re an RIA business model and you’re a fee-for-service advisor on top of it, it’s no issue. That’s always been the case. But if you’re more of a traditional advisor that gets paid on assets, and there’s outside assets and inside assets, that hasn’t been completely ironed out operationally.

But a lot of firms are thinking aggressively about it. [There has been] an M&A spree, and it shifted a little bit a few years ago away from “just scale inside the retirement space” to “we’re going to pick up wealth to have some of those capabilities and competencies that sit on the other side of the fence.” Historically speaking, most of that fired up from the first round of when the [Labor Department's] fiduciary rule came up.

David Blanchett, managing director and head of retirement research, PGIM DC Solutions: 

It’s important to understand the basis of the recommendation to roll out of the plan. If an individual is in a well-run plan with high-quality, low-cost investments, it’s probably going to be difficult for the advisor to build a portfolio that is much “better” in an IRA. At the same time, though, if the plan is relatively expensive (i.e., it’s a smaller plan/employer) and doesn’t have very good investments, it could definitely make sense to roll out. The potential issue here really can be what’s in the client’s best interest versus the advisor’s.

Most advisor compensation models are based on assets under management. Under this approach, the advisor generally needs to have custody of the assets to bill on it. This creates a clear incentive for the advisor to roll the moneys out of the plan.

There is somewhat of a conflict here from a compensation perspective. If the DC plan has investments that are potentially better than what the advisor has access to … the advisor should be indifferent between building and managing a portfolio in the DC plan versus rolling the money into an IRA. Again, though, this can potentially come down to how the advisor can get compensated.

For example, an advisor who bills clients on an hourly or retainer basis should be a lot more unbiased about where the assets are than an advisor who needs to physically be managing the money to get paid. I don’t want to suggest advisors can’t/don’t add value, since I’ve done lots of research that suggests they can/do, but there are going to be potential compensation conflicts depending on the structure.

Therefore, it’s important for retirees to really understand why/how rolling the money out of the plan is truly going to be in their best interests, especially because once [they] roll out of the plan [they’re] not going to be able to get back in. It’s effectively an irrevocable decision.

Katherine Roy, managing director and chief retirement strategist, J.P. Morgan Asset Management:

[There is a] confluence of DC advisors doing wellness programs, [so] plan sponsors are being more open to advisors within their companies helping on these broader wellness programs. That results in DC advisors who are fiduciaries getting more involved in investment discussions with participants directly. That will have implications for those participants who are at the point [where] they could roll out or stay.

[We’re] also seeing wealth management firms who have advisors that are focused on being fiduciaries for households [and] they’re also happy to step in and and provide guidance in the plan because they have a fiduciary process. They are helping someone with outside assets take into consideration a growing balance in their 401(k) plan and how that’s invested and make sure they’re well-coordinated, particularly with tax planning and that type of thing going forward.

So I think it’s really shifted. We’re also seeing firms proactively stepping in and saying [as] a wealth management client [we] will give advice on your 401(k) plan that 20 years ago [we] would not have done. So the lines kind of between the IRA and the DC plan are a little less delineated now than they’ve been in the past, which is a good thing. Obviously, plan sponsors [have to] do a ton of work to make sure they’re giving their participants a good lineup in their plans.