Data & Research November 14, 2013

Retaining Retirement Savings from Job to Job

Research from the Employee Benefit Research Institute (EBRI) reveals that more employees are preserving their retirement savings as they change jobs.
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A recent analysis from the Washington, D.C.-based EBRI indicates that the preservation of retirement benefits appears to have improved between 1986 and 2012. In addition, more employees who spent their retirement savings used it to improve or enhance their financial situation, choosing to pay down debt or buy a home, rather than on pure consumption.

Using U.S. Census Bureau data, EBRI analyzed how employees take lump sum distributions from their retirement plans when they change jobs. When retiring or changing jobs, a person has options for their retirement account such as:

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  • Leaving the money in their current plan;
  • Rolling it over to another tax-qualified savings vehicle, such as another employer-sponsored plan or individual retirement account (IRA);
  • Cashing it out to spend or invest in a different manner than through a tax-qualified savings vehicle; or
  • Some combination of the above choices.

“What workers choose to do with their retirement plan assets upon job change can profoundly affect their financial resources in retirement, particularly in the case of younger workers and those with large balances,” says Craig Copeland, senior research associate at EBRI and author of the report. “While improvement has been made in the percentage of employment-based retirement plan participants rolling over all of their balances on job change, this behavior varied significantly across participants’ ages at the point of distribution and the amount of the distribution.”

The EBRI research notes that the percentage of lump sum recipients who used the entire amount of their most recent distribution for tax-qualified savings has increased sharply since 1993. Well over four in 10 (45.2%) of those who received their most recent distribution through 2012 did so. This is compared with 19.3% of those who received their most recent distribution through 1993 and 35.4% through 1998.

Just 7.5% of recipients whose most recently received distribution came in 2012 spent the money entirely on consumption. This is compared with 22.7% for those who received a distribution through 1993 and 15.1% through 2003.

As to what plan sponsors should do in light of these findings, Copeland told PLANADVISER that these new employees should be encouraged to participate in their current employer’s retirement plan.

“While more assets are good for the plan as a whole, the main benefit of participation for employees is the ability to consolidate their portfolio, which may be scattered in separate retirement vehicles,” Copeland says.

He added that this centralization of investments can also provide employees with better guidance on what to do with their money, since the advice for handling a single, large balance could be substantially different than what to do with multiple, smaller balances.

In terms of whether plan sponsors need to step up efforts to educate employees about what their retirement plan and investment options are, Copeland says employees coming in with balances from other plans have money that needs to be managed.

"These employees need to know all the options that will help them with successful financial planning and a successful future,” Copeland says.

With regard to whether plan sponsors need to provide employees with better access to online guidance and investment advice, Copeland says delivery of such tools online seems better suited to younger employees, who have more trust in them.

"Older participants seem to prefer face-to-face meetings and print materials," Copeland says. "In any case, employees must understand that they will need to build a nest egg that will last them throughout their retirement.”

Copeland adds that the more specifics that plan sponsors can show employees, especially in terms of personalized goals and advice, the better. Participants are more comfortable saving, he says, the better they understand the investment process.

More information about this research can be found under the title “Lump-Sum Distributions at Job Change, Distributions Through 2012,” which appears in the November EBRI Notes on the EBRI website.

The Markets November 14, 2013

Average 401(k) Balance Sees Increase

Fidelity Investments says the average balance of its 401(k) plan accounts rose to a record high of $84,300 at the end of the third quarter.
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That is an increase of 11.1% from last year, according to the 401(k) provider, and largely the result of a resurgent stock market. Fidelity’s analysis also found that employees who were continuously active in their 401(k) plan over the last 10 years saw average balances jump 19.6% to $223,100 during the past year. For preretirees, age 55 or older, who have been active in their plan for at least 10 years, the average balance is now $269,500.

Fidelity also found that with the increased adoption and availability of target-date funds and managed accounts in workplace retirement plans, one out of three employees now utilize a professionally managed investment option for 401(k) assets. This is a change from a decade ago, when nearly all plan participants were “do-it-yourself” investors and made the bulk of their investment decisions completely on their own.

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“Today’s 401(k) plan is profoundly different than it was a decade ago,” says James MacDonald, president of workplace investing at Fidelity. “Plan design has evolved greatly to reflect the fact that 401(k) plans are often the primary driver of retirement savings for most working Americans. Professionally managed investment options can help working Americans achieve better retirement outcomes by creating a diversified portfolio, which is often the most challenging aspect of participating in a workplace retirement plan.”

The Fidelity analysis found that the population of participants who are choosing their own investment lineup has dropped dramatically with the rise and use of target-date funds and managed accounts.

At the end of the third quarter, one-third (33.1%) of 401(k) participants had 100% of their plan assets in a target-date fund, up from 3% just 10 years ago. Fidelity says the appeal of TDFs to participants is that such professionally managed mutual funds provide an age-based, diversified portfolio that gradually becomes more conservative as a participant nears, and then enters, retirement.

For younger Generation Y participants, 55% had all of their assets in a target-date fund, providing this population with a considerable improvement in their age-based asset allocation over prior years.

The analysis also shows that as participants age or build larger balances, they may be faced with more complex and competing financial needs. For these participants, a professionally managed account can provide an experience that takes into consideration assets outside their 401(k), such as an individual retirement account (IRA), pension or spouse’s savings, as well as an investor’s varied risk tolerances and retirement dates.

Since the third quarter of 2009, Fidelity has seen a more than three-fold increase in the portion of employers offering managed accounts to their employees, as well as the number of participants taking advantage of the service. In addition, assets in retail managed accounts such as IRAs or individual brokerage accounts have more than doubled since then. An infographic displaying information about third quarter average 401(k) balance over the past 10 years can be seen here.

“A managed account acknowledges that some participants prefer a more personalized approach with their investment strategy based on their specific needs, including their emotional tolerance for risk or assets outside their 401(k),” MacDonald says.

As to what plan sponsors can do in light of this growth of “do it for me” participants, many have already adopted investment options, such as target-date funds, that better suit this hands-off approach, Jeanne Thompson, vice president of market insights at Fidelity, told PLANADVISER.

“After the release of the Pension Protection Act and the impact of the recession, many people found that they didn’t have the stomach for investment decisions," Thompson says. "Now we are seeing a more hands-off approach, with people realizing that they don’t have the skills or time to make such decisions on their own.”

In terms of plan design, says Thompson, plan sponsors can help these participants by adding automatic enrollment and defaulting them into a fund. With younger participants, she adds, it is not so much that they are being defaulted into something like a target-date fund as that the process is automatic.

Thompson says that plan sponsors should also be ready for more questions from older participants, since they pay more attention to their balances once they reach a larger amount.

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