Client Service November 2, 2016

Analysis Supports 'Through' TDFs and Partial Withdrawals in DC Plans

An analysis of DC participant distribution behavior supports the use of 'through' TDFs and the allowance of partial distribution options to help participants preserve their assets and develop retirement income strategies.
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Seven in 10 retirement-age participants (defined as those age 60 and older terminating from a defined contribution (DC) plan) have preserved their savings in a tax-deferred account after five calendar years, according to research from Vanguard.

In total, nine in 10 retirement dollars are preserved, either in an individual retirement account (IRA) or employer-sponsored DC plan account.

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The three in 10 retirement-age participants who cashed out from their employer plan over five years typically held smaller balances. The average amount cashed out is approximately $20,000, whereas participants preserving assets have average balances ranging from $160,000 to $290,000, depending on the termination year cohort.

Only about one-fifth of retirement-age participants and one-fifth of assets remain in the employer plan after five calendar years following the year of termination. In other words, most retirement-age participants and their plan assets leave the employer-sponsored qualified plan system over time.

Vanguard examined the plan distribution behavior through year-end 2015 of 365,700 participants age 60 and older who terminated employment in calendar years 2005 through 2014.

One important question is how plan rules on partial distributions might affect participants’ willingness to stay within an employer plan. Eighty-seven percent of Vanguard DC plans in 2014 required terminated participants to take a distribution of their entire account balance if an ad hoc partial distribution was desired. For example, if a terminated participant has $100,000 in savings, and wishes to make a one-time withdrawal of $100, he or she must withdraw all savings from the plan—for example, by rolling over the entire $100,000 to an IRA and withdrawing the $100 from the IRA, or by executing an IRA rollover of $99,900 and taking a $100 cash distribution.

NEXT: Withdrawal behavior affected by allowing partial distributions

 

Only 13% of plans allow terminated participants to take ad hoc partial distributions. However, plans allowing partial distributions tend to be larger plans, and as a result, only three in 10 retirement-age participants are in plans allowing ad hoc partial distributions.

The analysis suggests participant behavior is affected by plan rules on partial distributions. For the 2010 termination year cohort, Vanguard analyzed participants in plans allowing partial distributions separately from those in plans that did not. About 30% more participants and 50% more assets remain in the employer plan when ad hoc partial distributions are allowed. In the 2010 cohort, five years after termination, 22% of participants and 26% of assets remain in plans allowing partial distributions compared with only 17% of participants and 18% of assets for plans that do not allow partial distributions.

Jean Young, senior research analyst at the Vanguard Center for Retirement Research and lead author of the study report, says these findings have implications for the design of target-date funds (TDFs) and retirement income programs. “The tendency of participants to preserve plan assets at retirement supports the notion of ‘through’ glide paths in target-date fund design. In other words, target-date designs should encourage an investment strategy at retirement that recognizes assets are generally preserved for several years post-retirement, she says.

“Also, with the rising importance of lump-sum distributions, participants will need assistance in translating these pools of savings into a regular income stream. Based on current retirement-age participant behavior, most of these retirement income decisions will be made in the IRA marketplace, not within employer-sponsored qualified plans, although this may evolve gradually with the growing incidence of in-plan payout structures and the new Department of Labor (DOL) fiduciary rule. One way sponsors might encourage greater use of in-plan distributions is by eliminating rules that preclude partial ad hoc distributions from accounts,” she concludes.

Data for the analysis comes from Vanguard’s DC recordkeeping clients over the period January 1, 2005, through December 31, 2015.

 

In Practice November 2, 2016

Cambridge Will Keep Supporting Commission-Based Retirement Accounts

While a handful of firms are moving away from commission-based retirement accounts in light of the DOL’s fiduciary rule, Cambridge Investment Group says it will keep supporting these accounts as it develops its own fiduciary strategy for its advisers.
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Cambridge Investment Group announced it will keep supporting fee-based and commission-based retirement accounts for its independent financial advisers and their clients.

The independent broker/dealer says it’s in the final stages of constructing the processes and tools designed to help its advisers implement their own fiduciary capacity based on their clients’ needs, book of business, and the business model they have chosen for their independent firms. Cambridge says it will continue supporting these initiatives in order to offer advisers flexibility, while also complying with the changing regulatory space.    

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“We think every firm should have a unique value proposition while serving the best interests of the investing clients,” says Cambridge Investment President Amy Webber. “Serving the needs of the client must clearly be the highest priority, along with observing regulatory requirements, but after that, decisions regarding fee-based or commission-based retirement accounts are more about the business approach and culture that defines every firm, whether it’s a broker-dealer, RIA [Registered Investment Adviser], or a firm owned by an independent financial professional.”

Cambridge intends to apply the DOL’s Best Interest Contract (BIC) provision to certain commission-based accounts, while discretionary advisory business will be supported through level-fee platforms. While commission-based retirement accounts will be acceptable at Cambridge, the commissions must be levelized by each predefined investment category so that all similar investment options have the same compensation structure.

“Cambridge has long been a leader in fee-based accounts, but we believe the investing client and their trusted financial adviser must have access to appropriate choices they can consider for their unique retirement needs,” says Webber. “With choice and compliance in mind, we’ve identified four business paths our advisers can choose from as we work together to forge the best path forward.”

Cambridge identified these four business paths as non-retirement investing client, small accounts, Best Interest Contract, and level-fee fiduciary. Cambridge’s Fiduciary Services team is creating Advisor Fiduciary Plans to offer each adviser insight into the accounts effected by the new DOL rule, as well as outlining the steps the adviser needs to take to comply with the new DOL rule.

The Conflict of Interest rule often dubbed as the DOL Fiduciary Rule has an applicability deadline of April 10, 2017, and a full implementation deadline of January 1, 2018.

Cambridge Investment Group’s move stands in contrast to other broker/dealers including Merrill Lynch and Commonwealth Financial Network, which will cease offering commission-based products in individual retirement accounts (IRAs), and all retirement accounts, respectively. 

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