Advice to Slow Leakage Critical Point in Fiduciary Fight

Research from the December 2015 edition of The Cerulli Edge underscores the power of an adviser to slow loans and leakage from defined contribution (DC) retirement plans.

The report cites survey data showing, regardless of income level and career stage, plan participants across the employment spectrum feel unsure about what to do with retirement accounts from former employers. There is significant temptation to cash out retirement accounts when changing jobs, Cerulli notes, made worse by a lack of appreciation for the sharp fees and taxes associated with early withdrawals.

“While presenting investment recommendations may become difficult in a highly regulated environment, education about the importance of avoiding premature withdrawals and other planning-oriented issues will be critical,” Cerulli says.

The research highlights the fact that, although the DC retirement planning industry has had success with auto-enrollment programs, there is still very little automaticity on the back end of the system—leaving participants to make their own manual choices at a financial planning stage that in many respects is more complicated than accumulation. “Participants, sometimes under minimal guidance, make important decisions, such as the election to roll over or take a cash distribution, that can affect their long-term retirement prospects,” the report suggests.  

“While representing only a small subset of the overall asset pool, plan-to-plan rollovers will trend upward as the Department of Labor continues to push the DC plan as the safest place for retirement balances,” Cerulli predicts. “Until more DC plans allow for partial drawdowns, in-plan retirement income will not be a large-scale possibility.”

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Cerulli cites data from the Bureau of Labor Statistics showing workers today on average change jobs nine to 12 times during their adult working lifetime.

“Essentially, if participants were automatically enrolled at a robust 6% (not currently the norm), and escalated 1% annually, by the time they reach the minimum recommended deferral percentage of 10%, they switch jobs and start all over again,” Cerulli explains. “Compound this deferral problem with nine or 12 decisions as to whether to leave the account as is, roll it over, or take a cash distribution, and all of a sudden, numerous obstacles to saving start to present themselves.”

Cerulli concludes that all investors will face major decision points where misinformation can lead to poor decisionmaking, especially as it relates to loans or early withdrawals. It’s an area where skilled retirement specialist advisers have the opportunity to do a lot of good and protect the assets in the plans they serve.

“These often costly actions are also exceedingly easy, even for the most uninformed participants to make, because they are often handled online without so much as a probe as to the reason for the withdrawal,” Cerulli warns. “We recommends that recordkeepers and employers, important sources of advice for the average participant, take the leading roles and start to stretch their offerings, especially when it comes to early distributions.”

Cerulli further predicts, “until more DC plans allow for partial drawdowns, in-plan retirement income will not be a large-scale possibility.”

Information on how to obtain this and other Cerulli research reports is here.