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Plan Sponsors Mostly Prefer Retirees Stay in Plan

Industry Trends and Research

A plurality of plan sponsors prefer that participants keep their DC plan balances in plan after they retire, according to a new report by T. Rowe Price. 

Nearly 4 in 10 plan sponsors (39%) prefer that participants keep their DC assets in plan after retirement, while only 17.8% prefer that participants exit the plan upon retirement (e.g., rolling over balances to an IRA, taking a lumpsum distribution, etc.), the firm reports in “What DC Plan Sponsors Prefer Retiring Participants Do and Why It Matters.” 

Additionally, 5.8% of plan sponsors reported that they were reconsidering their position regarding retention of retiring participants, signaling that the positions of some plan sponsors are in flux. At the same time, a large segment of plan sponsors reported “no clear preference” (37.2%) on the issue. 

“This should not necessarily be interpreted as simple indifference in all cases,” writes Lorie Latham, Senior Defined Contribution Strategist at T. Rowe Price and author of the report. “Many plan sponsors seem open to both options—support for participants who choose to exit the plan as well as for participants to remain in their DC plans. The views of plan sponsors in this group may skew more to principled neutrality rather than simple ambivalence.”

The report does observe, however, that there is a “clear discrepancy” between the retention preferences of sponsors of larger plans (assets of $500 million or greater) and sponsors of smaller plans (assets less than $500 million). Sponsors of larger plans are much more likely to favor retaining retiring participants in plan. Plan size in and of itself is probably not the direct cause, as smaller employers may simply be more concerned about their ability to provide administrative support for relatively large pools of retired participants over time, the report notes. 

Overall, the findings of greater interest in retaining retired participants may reflect an evolution of thought among plan sponsors and contrasts with a conventional view that a plan sponsor’s responsibility predominantly extends to the point of the participant’s retirement, the report explains. Rather than simply focusing on the needs of current employees, many plan sponsors appear increasingly open to supporting the needs of participants over longer time frames, including periods after retirement, it notes.  

As for why this matters, Latham explains that plan sponsors’ consideration of participants’ long-term retirement journey adds important context for making plan decisions. Taking a broad view of a participant’s retirement journey does not necessarily mean that a plan sponsor should provide access to a dedicated retirement income solution, but it will often inform plan objectives and desired outcomes. 

“In turn, these factors influence tangible plan decisions, like the evaluation and selection of plan investments (including target date funds), participant access to partial plan distributions and other payout options in retirement, and what the plan sponsor will communicate to retiring participants and the broader community of eligible employees,” Latham emphasizes.  

What’s more, she notes that within their research, most plan sponsors agreed that participants are better off keeping their DC plan balances in plan because of ongoing fiduciary oversight provided within the plan and the likelihood of lower investment management costs.

The findings in T. Rowe Price’s study are consistent with a new survey of large 401(k) plan sponsors that finds an increasing number want participants to keep assets in their plans after they retire.