Defined contributions plans have enabled employees to build nest eggs worth crowing about, and increasingly plan sponsors are finding ways to hold onto those assets after the employee leaves the workforce, according to a survey by Boston-based Cerulli Associates.
Almost 60% of plan sponsor clients who get advice from registered investment advisors or institutional consultants are actively seeking to hold onto employee-accumulated assets post-retirement by offering a wider range of income-producing products, the survey found.
“You’re seeing a lot more nuanced and advanced options becoming available now for folks who are retired and still have assets inside of their 401(k) plan,” said David Kennedy, a certified financial planner and Cerulli senior analyst specializing in the retirement market, of the results of the survey, which was conducted in 2022.
Until recently, target-date funds that include income-producing investments, annuities and other kinds of insurance-based guarantees have been the most popular decumulation options within DC plans, the survey found said. But on the upswing are nonguaranteed solutions outside of a target-date fund, such as managed payout funds and retiree-focused equity products.
While only 17% of asset managers currently offer managed payout funds, which are multi-asset-class investments that strive to provide regular, predictable income for retirees, this option saw the biggest increase in use—a 10% jump—from 2021 survey results.
For example, T. Rowe Price launched a managed payout option for DC plan participants that targeted a 5% annual distribution rate “higher than a more typical 4% distribution rate seen in similar products, [and] intended to help investors avoid regret from spending too conservatively in retirement while still operating within safe withdrawal rate guidelines,” the report said.
Meanwhile, DC plan recordkeepers, such as Fidelity or Empower, are poised to support the trend as it grows in years to come, Kennedy said.
Some 67% of recordkeepers currently offer target-date funds with a retirement income vintage, and another 22% plan to offer this in the next year. Fifty percent said they offer an investment with an annuitization component, and another 39% said they would offer this in the next year. About 44% offer a standalone annuity product, and that percentage will double in a year. And while only 35% can support a managed payout fund, another 53% will be adding that capability in the next year.
For plan sponsors, holding onto assets will make their plans more economical, Kennedy said. And for the advisors who service the plans, more assets often mean more fees.
But advisors who serve individual clients need not worry that persuading their clients to roll those nest eggs out of the plan and into an IRA will suddenly become a lot harder now that there will be more options for retirees.
“Having an already-existing relationship with a plan participant is a much bigger indicator of whether or not they’re going to roll over with you, as opposed to whether or not your associated with their 401(k) plan,” Kennedy said. “The better those advisors do—even if they don’t have a 401(k) business—if they’re out there creating relationships with folks who are building assets in their 401(k), they could still see a rollover down the road. Especially if it’s a higher-balance participant.”
While increased options are good for everyone, the real winners will be low-balance retirees who might not be able to either attract or afford a relationship with an advisor, Kennedy said.
“For the folks who have $500,000 and below, they’re just going to see an increase in the options that they have. And an increase in economical options,” he said. “They’ll have better do-it-yourself options available in their 401(k) plan, and they’re not going to have to face that choice of either working with an expensive financial advisor or just doing it on their own. They stand to benefit the most.”