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Employers who sponsor 401(k) plans have long encouraged workers to take their money out of those plans when they retire or leave a company.
“The trend was always to get the money out of the plan,” said Bonnie Treichel, the chief solutions officer at Endeavor Retirement, a retirement-plan consulting firm.
But a shift from that historical trend is starting to happen. And don’t be surprised if your employer asks you to keep your money in the plan when you retire and suggests that you move your money into something called a managed payout fund.
In fact, a growing number of the 625,000 employers who offer 401(k) plans to some 60 million workers are increasingly trying to keep employee assets in their plans instead of watching them go out the door postretirement.
Nearly six in 10 (58%) of plan sponsors (this is typically the employer) now actively seek or prefer to retain participant assets postretirement, according to a survey of retirement plan consultants by Cerulli Associates.
“More plan sponsors are wanting to keep the money in the plan,” said Treichel.
What’s more, managed payout funds—multi-asset-class investments that aim to produce regular, and predictable, income for investors— have received “scant attention” in the “gnarly world of retirement income.” But that too is about to “change as plan sponsors struggle with helping plan participants draw down their retirement savings,” according to Pensions & Investments.
Consider this: These funds currently have relatively low adoption rates among asset managers (17%), according to David Kennedy, a senior analyst focused on retirement issues at Cerulli Associates. However, managed payout funds also experienced the most significant percentage increase in usage compared to the 2021 survey results (10%).
And, most recently, Pensions & Investments reported that Callan, an investment consulting firm, last year helped an employer search for — and select — a managed payout fund provider for the employer’s multiple 401(k) plans, which collectively hold more than $5 billion in assets.
The motivation behind this shift is multifaceted and varies based on the size and objectives of the plan sponsor, experts said. But there are some key reasons for retaining assets in the plan: including monetary incentives and a desire to take care of employees, according to Kennedy and others.
Negotiating lower costs
Choosing to retain 401(k) assets of retired workers may lead to a likely decline in fund fees and/or record-keeping fees for plan sponsors, according to Mike Webb, a senior financial adviser with Captrust.
This potential reduction in fees can be attributed to the fact that the fees charged for 401(k) plans are typically based on the size of the employer’s 401(k) plan and the number of participants. In the past, plan sponsors didn’t necessarily want the trouble of keeping their former employer’s nest egg in the plan.
But now: More assets and more participants equal lower fees.
“The more assets that you have in your plan, the greater the economies of scale, the more negotiating power that you have with all the different firms that you have to work with,” said Kennedy.
Treichel agrees that larger plan sizes enable plan sponsors to negotiate better record-keeping fees, which can benefit both participants and the sponsor. “The more plan assets that you keep…the better you can do when you go to negotiate (fees), depending on average account balance,” she said. “Plan size matters because when you have a larger plan size, then you can get better record-keeping costs. So, it matters for negotiation.”
And there are indeed more assets in plans now than, say, 10 years ago. According to Vanguard’s data in 2022, the average 401(k) balance for workers aged 65 and older was $279,997. By contrast, the median 401(k) balance for workers in their 60s at year-end 2012 was $77,793, according to the Investment Company Institute.
The size of account balances in retirement plans has increased over the past decade, partly due to demographics — aging baby boomers—and strong market performance since the 2008 financial crisis, Kennedy said. “And a lot of record-keepers and plan sponsors don’t want to lose that big chunk of assets.”
Now the fees charged by a 401(k) provider — administrative, plan consulting and investment — can vary depending on the size of the employer’s plan, the number of participants, and the plan provider. According to the Labor Department, here is a range of fees based on the number of plan participants:
· For small plans (less than 100 participants), the total annual cost can range from 1.5% to 2.5% of assets.
· For medium plans (100-1,000 participants), the total annual cost can range from 1.0% to 2.0% of assets.
· For large plans (more than 1,000 participants), the total annual cost can range from 0.5% to 1.5% of assets.
Investment fees, meanwhile, can range from 0.3% to 1% or more of the account balance, according to the Plan Sponsor Council of America (PSCA). And administrative fees can be paid by either the 401(k) participant or the plan sponsor, while investment fees are (in most cases) paid by plan participants, according to the PSCA.
Paternalistic protection
Treichel also speculated that plan sponsors that choose to retain assets may be motivated by a sense of responsibility and a desire to protect participants, paternalism if you will. By offering competitive pricing and services within the plan, they aim to support participants’ financial security. “It’s this idea of being paternalistic and protecting your participants,” she said. “By keeping them in plan, they (plan participants) can get better pricing in plan than out of plan.”
“Plan sponsors want to do right by their employees,” said Kennedy. But employers also want to use their efforts to recruit and retain employees, he said.
At least one plan sponsor agreed that paternalism is among the reasons.
“Paternalism is one reason, but it’s not the only reason,” said Kevin Hanney, a senior director of pension investments at RTX Corporation. “The business case for offering options that guide, manage, and/or guarantee withdrawals from qualified plans is very strong and quantifiable. Savvy employers need to consider that the risk-adjusted ROI on the plan is significantly higher when we offer prudent alternatives for spending retirement savings.”
RTX Corp. (formerly known as Raytheon
RTX,
) offers the Lifetime Income Strategy in the RTX Savings Plan. That fund, said Hanney, is a 21st century pension that offers guaranteed income and daily liquidity through a 401(k). That, it’s worth noting too, received the P&I/DCIIA Excellence and Innovations Award when it launched in 2012 and the recognition since then has been “pretty astounding,” said Hanney.
Plan sponsors are also stepping up efforts to help participants determine whether they’ve saved enough to fund their desired standard of living in retirement, Treichel said.
“They have some participants who’ve actually saved enough, but they don’t realize they’ve saved enough so they’re not retiring,” she said. “It’s like helping people know, it’s actually OK to retire.”
At the other end of the spectrum, plan sponsors are stepping up to help those who haven’t saved enough figure out to save more. “It cuts both ways,” Treichel said. “How do we help those save enough and those who’ve actually saved enough feel like they can retire.”
Plan sponsors don’t have a fiduciary obligation to care for their workers in this manner. But there’s a growing effort on the part of employers and others to help workers improve their retirement security.
The Labor Department enacted regulations that should help retirement account owners translate the money in their 401(k) into income. In 2021, plan sponsors were required to include two lifetime income illustrations on participants’ pension benefit statements at least once annually. The illustrations essentially show the income a participant’s account balance would produce in today’s dollars when used to purchase a single life annuity or a qualified joint and 100% survivor annuity.
Read: How much income will your 401(k) provide?
Participant tracking
There are reasons why plan sponsors want retirees and former employees to take their money out of the plan. For one, plan sponsors are required to keep track of their participants and that’s not such an easy task, said Treichel. And two: “You have to keep up with those administrative requirements,” she said.
To make matters even worse, the Labor Department has a program on missing participants that provides guidance to plan administrators on how to locate and contact missing participants in their retirement plans. But the guidance is not entirely clear on how to implement it, according to Treichel.
Additionally, plan sponsors are responsible for paying record-keepers for the programs used to keep track of former employees. And that’s a cost some plan sponsors might not want to bear.
“Ultimately it is the plan sponsor’s job to keep track of participants,” said Treichel.
Managed payout funds
More and more plan sponsors are including managed payout funds in their 401(k) investment options.
And the reasons are simple.
Retirement income conversations: As conversations around retirement income become more prevalent, managed payout funds, though a non-guaranteed option for generating retirement income, present an attractive option for plan participants seeking income solutions without committing to annuities, the guaranteed income solution.
“I think that the managed payout option is increasing in popularity because the overall income conversation is becoming very popular,” said Treichel. “It’s at every conference, it’s at every conversation. You have to talk income and the first question is guaranteed versus non-guaranteed. So, that managed payout conversation is coming up.”
Others agree that plan sponsors, plan participants and plan providers, policy wonks and the list goes on are all laser-focused on trying to help workers figure out how to generate income in retirement.
“My sense is that retirement income overall is becoming a bigger focus for the industry and plan sponsors,” said Kennedy.
In-plan convenience: Offering managed payout funds within the plan provides a seamless solution for participants, making it more likely for them to opt for these funds instead of looking for alternatives outside the plan. For lower balance rollovers, plan participants may find benefits in staying within the plan, thanks to lower fees, Erisa protections, and available customer service, said Kennedy.
Indeed, such funds are a good alternative for workers with 401(k) account balances that may be under $1 million, who might not find a financial adviser to work with, said Kennedy.
Such funds are also a good alternative for those who think using the 4% rule to withdraw money from a retirement account is too risky and that using annuities to generate income in retirement is too restrictive. Plus, it’s an easy sell to get someone who’s been accumulating assets for retirement using a target-date fund to switch into a managed payout fund to distribute those assets.
“It’s a natural progression,” said Treichel. “We helped you get up the mountain, we’ve got to help you get down the mountain. And how are we going to naturally help you do that? Managed payout is an easy part of the conversation.”
Among other things, Treichel said it’s important for plan sponsors to provide simple and effective income solutions within the plan, especially as participants approach retirement age and need help managing their income.
Challenges and future developments
Though the trend towards retaining assets and managed payout funds is promising, the retirement industry is still in its early stages of developing comprehensive in-plan retirement income solutions and there are plenty of challenges.
Technology integration: Plan sponsors and record-keepers face the challenge of integrating new technologies to provide efficient and seamless income solutions.
Behavioral nudges: Implementing effective nudges to encourage participants to select income solutions within the plan remains a continuing challenge.
Participant education: Educating plan participants about various retirement income options and helping them make informed decisions is crucial for successful adoption.
So, what does the future hold?
For starters, retirement-income product innovation is likely to accelerate. Kennedy noted, for instance, that LGIM America introduced in 2022 a liability-driven investment (LDI) product, and Guardian Capital in 2022 introduced a “modern tontine” product lineup for retirement planning in Canada.
The LDI fund from LGIM America, the Legal & General Retirement Income 2040 Fund, is designed to provide current income during the early and middle years of retirement while ensuring capital is not exhausted prior to the fund’s terminal date. These solutions use Monte Carlo analysis to determine an appropriate payout rate based on an individual’s probability of success, which could offer a more customized approach to retirement income, said Kennedy.
As for tontines, they are a financial arrangement in which a group of individuals contribute to a common fund and receive regular income from that fund for the rest of their lives. Guardian Capital’s GuardPath lineup is designed to mimic aspects of annuities and defined-benefit pension plans.
In addition, Kennedy said managed accounts are expected to play a significant role in the retiree space, offering personalized solutions and access to educational resources. Despite their higher cost, the benefits of personalized advice may outweigh the expenses, he noted.
Bottom line: The industry, said Kennedy, is likely to witness more product innovation as retirement plan balances grow and plan sponsors pay greater attention to their retired workers’ needs.
“The demand is there right now,” said Kennedy. “You’re seeing some uptick in terms of actual adoption. And depending on where that goes, I would imagine that you’re going to see a lot more uptake in this space. There’s a lot of money, there’s a lot of demand. I would imagine that there’s at least several companies that will be diving in and making it a bigger part of their revenue going forward.”
Before they dive in there’s this: “These income solutions both on the managed payout and the guaranteed side…they’re in the first inning.”
Regardless of what inning the game is in, Kennedy believes the plan participant will be the ultimate winner.
