A new report by Cerulli suggests that many larger plan sponsors have an interest in retaining the assets of retired participants, while providers say that some of their larger plan sponsor clients are actively seeking to make their plans more retiree-friendly.
In U.S. Retirement End-Investor 2021: Solving for the Decumulation Phase, the firm notes that 84% of 401(k) plans sponsors with greater than $500 million in assets prefer to keep participant assets in the plan during retirement.
While this is a topic that is subject to ongoing debate, one viewpoint is that increased scale provides leverage to negotiate favorable pricing arrangements with asset managers and other providers, while participants maintain access to institutionally priced investment products and services during their retirement years. This is particularly relevant to those who work at larger organizations where collective investment trusts and separately managed accounts are commonplace, the report observes.
But while the DC industry has made strides in aiding plan participants through the accumulation phase of their financial lives, plans are not typically designed to effectively support participants through their retirement years, it adds.
Cerulli suggests, however, that retiree-friendly DC plans—through comprehensive retirement planning and advice solutions—could serve as attractive retirement destinations for retirees in the lower end of the mass affluent market ($500,000 to $2,000,000 in investable assets), middle market ($100,000 to $500,000), and mass market (less than $100,000).
Noting that the vast majority (95%) of DC recordkeepers now offer a managed account program on their platforms, the firm believes that plan sponsors and providers will position these programs increasingly as in-plan retirement income solutions. Moreover, active workers frequently cite their 401(k) provider as their primary source of retirement advice, the report notes.
While IRA rollover decisions tend to vary depending on the DC participant’s level of wealth, the research found that participants with at least $2 million in investable assets commonly cite the wider array of investment options available in an IRA (47%). Additionally, 56% of retirees across all age and wealth tiers indicate that the ability to withdraw funds as needed is the most important feature of a retirement account.
Considering those factors, decumulation-oriented plan design changes could result in new opportunities for asset managers and other retirement providers. “Over time, we think the decumulation experience in retiree-friendly plans will begin to more closely resemble the out-of-plan, retail advisory experience for many retirement investors,” notes Shawn O’Brien, senior analyst at Cerulli.
In many cases, making DC plans effective decumulation vehicles will call for substantial plan design changes to ensure participants have the planning tools, advisory services, withdrawal options and investment opportunity set necessary to carry out their retirement income strategies, the report notes. “As new plan design offerings materialize, asset managers and insurers should proactively communicate the value proposition of their income-oriented investment products and illustrate how these products can help retirees achieve superior financial outcomes in an in-plan setting,” O’Brien emphasizes.
