“Retaining these participants’ assets, even after they retire, can assist DC plan sponsors in achieving and retaining plan economies of scale,” she said. “As a plan loses larger accounts, both its total size and the average size of its individual accounts decline. All else being equal, such losses work against securing lower record-keeping and investment management fees for all employees, whether active or separated.”
Beichert said it was vital to ensure that separating participants make appropriate decisions about how to handle their distributable plan assets since lump-sum distribution is irreversible; assets distributed from the plan lose plan fiduciary protections; and assets rolled into IRA accounts may result in higher fees.
In Paper No. 4, Toni Brown of Capital Group tells plan sponsors how to put all the components of a retirement tier into practice. She indicated that a good place for plan sponsors to start was by reviewing options and services that are currently part of their plan.
Once the plan sponsor has gathered data about the company’s current plan, such as by identifying products, tools and services offered by service providers, Brown said the next step in designing a retirement tier is to perform a gap analysis of additional options and services the plan sponsor would like to add to it.
Brown cautions plan sponsors to be mindful of one additional step they need to take.
“Lastly, as with all planning processes, once you have added a retirement tier to your plan, it would be prudent to periodically review its original objectives, to see that they are being met as effectively as possible,” she said.
In Paper No. 5, Elizabeth Heffernan of Fidelity Investments answers the question, “Are partial distributions for retirees right for your plan?” by weighing the pros and cons of such a tier feature.
According to Heffernan, as long as plan sponsors keep in mind the tier’s overall purpose—to help participants approaching or in retirement—there are no specific features that a retirement tier must include. In fact, she suggests that a plan sponsor consider creating an introductory retirement tier with retiree-focused components, such as education or advice, even if the plan requires full withdrawals.
Ultimately, Heffernan said, plan sponsors will have to weigh the pros and cons of allowing partial withdrawals and strategies encouraging retirees to stay in the plan based on the plan’s demographics and goals.
“It’s also worth noting that plan sponsors may wish to handle participants who terminate prior to retirement differently than those who separate due to retirement, as the latter may retain other benefit-related or retiree association connections to the firm,” she said.