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Cerulli: 401(k) Participants ‘Clueless’ About Decumulation

New research reveals that many 401(k) plan participants still do not know what to do with their proverbial “pile of money” at retirement and need guidance.

Findings from “The Cerulli Edge?U.S. Retirement Edition, 2Q 2018 Issue” show that participants aren’t always clear on what they should do with their 401(k) accounts once they exit the workforce and suggest that advisors can play a larger role in supporting a sustainable drawdown strategy.

Cerulli observes that, since its inception, the 401(k) plan industry has devoted much of its energy to addressing the accumulation component of saving for retirement, but the industry is slowly turning its attention to decumulation.

In recognition of this, the firm posed the following question to 401(k) plan participants age 45 and older: “When you retire, what do you plan to do with your savings?” The results show that “participants are generally clueless as to what they will do with their accumulated savings,” explains Cerulli's Jessica Sclafani.

According to the report, one-quarter of the 401(k) participants over age 45 who were surveyed say they do not know what they will do with their 401(k) savings when they retire and another one-quarter plan to engage their financial advisor.

Sclafani states that “the latter data point can be read as a marginally more prepared version of ‘I don’t know,’ which, in sum, suggests that half of 401(k) plan participants have no idea what to do with the savings they have diligently set aside for retirement.” She further notes that another 8.5% of respondents say they will hire a financial advisor to help them.

Stay or Go?

In addition, the report shows that of the 21% of total DC assets eligible for distribution, participants’ indecision regarding what to do with their accumulated savings is reflected in the finding that 68% of such assets stay in a plan.

The firm suggests that advisors, consultants and providers work closely with their plan sponsor clients to identify the sponsor’s preferences for retaining the assets of retired participants in the plan and ensure these preferences are reflected in the plan’s available distribution options (e.g., single lump-sum, installment payment program or “SWP,” partial withdrawals, and in-plan annuities).

From there, these same parties should implement targeted campaigns to plan participants approaching retirement publicizing what their options are upon reaching retirement, the report further advises.

As for the role of advisors, even though the defunct DOL fiduciary rule and rules proposed by the SEC and several states have focused on eliminating opportunities for bad actors, Cerulli suggests that there is clearly demand for withdrawal advice from individuals. The firm “believes that in addition to asset allocation products that evolve as an individual ages (e.g., target-date funds or managed accounts), participants nearing retirement age should also receive withdrawal advice, as the order by which they access their savings and begin to receive Social Security benefits will have a significant impact in terms of how long their savings may last,” the report states.

Unrealistic Retirement Age?

The firm further suggests that U.S. consumers are likely “overly optimistic” in terms of when they expect to be able to retire with adequate savings.

According to the 2018 Cerulli 401(k) Plan Participant Survey, the data shows that respondents anticipate an average expected retirement age of 64 to 65. The firm notes that the average anticipated age for men and women yielded similar results of 64.6 and 64.2, respectively, which it suggests is “somewhat troubling” given that women are expected to live almost three years longer than their male counterparts.

This disconnect between expected retirement age and life expectancy may not be fully appreciated by consumers leaving them vulnerable to depleting their savings. With expectations of retiring close to age 65, Americans will need enough retirement savings to fund their living expenses for nearly two decades, which is a “daunting prospect,” the firm notes.

Data in the report is from a second quarter 2018 Cerulli survey of 1,000 active 401(k) plan participants.