The overwhelming majority of defined contribution plan participants at retirement age roll their retirement savings over from their employer’s plan to an individual retirement account within five years of leaving the company, according to new research by Vanguard. But most refrain from taking distributions for years afterward.
This common decision has implications for the “to versus through” debate in target-date fund design and demand for in-plan versus out-of-plan retirement income sources, according to a report studying 2014 data from Vanguard, a mutual fund firm and third-party administrator for thousands of employer-sponsored 401(k) plans.
The report adds to a decade of analysis of older workers’ DC plan distribution decisions. Vanguard looked at data from 249,600 participants aged 60 and older about its recordkeeping clients who terminated employment in the calendar year. The average account balance in the sample ranged from $107,000 to $180,100, depending on the termination-year cohort, Vanguard said.
With the knowledge that so many retirement-age participants plan to move their retirement savings from the employer’s account upon leaving the company and park the money for a while, plan sponsors may want to reconsider whether their plan should use a conservative “to retirement” approach that assumes assets are going to be used immediately, Vanguard said.
Questions About In-plan Retirement Income
In addition, this rollover trend by retirement-age participants raises questions many plan sponsors are starting to ask. Should retirement income programs, such as qualifying longevity annuity contracts , designed to help participants translate account balances into lifetime income streams, be offered within qualified retirement plans?
Examining the group with the longest history in Vanguard’s 10-year study, the firm said that of retirement-age participants who left employment in 2004, about nine in 10 of their retirement savings dollars were preserved through the end of 2014. Specifically, 4 percent of assets remained in the plan with no installment payments, 12 percent of assets stayed in the plan with installment payments, and 72 percent of the cohort’s assets had been rolled over to an IRA.
The latest Vanguard paper also looked in particular at older participants who terminated employment in 2008 and 2009, years marked by a global financial crisis and severe drop in stock prices. In analyzing how they handled their retirement assets in the years afterward, the mutual fund firm found that this group made similar choices to others with less-dramatic market conditions in place at the time of their separation from service, namely avoiding drawing down much of their retirement savings in the years shortly after leaving an employer.
“What seems remarkable is that cash-out rates for retirement-age participants terminating in 2008 and 2009 were not substantively different from cash-out rates for retirement-age participants in earlier years,” Vanguard said. “At least in this analysis, the Great Recession seems to have had little effect on plan distribution behavior among retirement-age participants.”
The paper is “Retirement Distribution Decisions Among DC Participants — An Update.” To read the complete story on Thompson’s HR Compliance Expert, click here.