Long-Term Participants Create Challenges, Opportunities

Special Coverage

In late October, Michael Doshier was in meetings with a retirement plan and wealth aggregation advisory. One topic dominated: managing the fact that participants are staying in 401(k) plans near and into retirement.

“It’s a hot topic, for sure,” says Doshier, who travels the country representing T. Rowe Price as its senior defined contribution adviser strategist.

Doshier, who works closely with T. Rowe Price’s research team, notes analysis drawn from the firm’s own recordkeeping business showing that participants 65 and older are staying in plan for longer periods of time. That includes 43% of people aged 69 remaining in their workplace plan four years after the traditional retirement age.

The reasons for this trend are many, Doshier says. But a key one may be the bull run after the global financial crisis of 2008 and 2009 that kept most retirement investments trending upward.

“As my dad used to say in Oklahoma, ‘If it ain’t broke, don’t fix it,’” Doshier quips. “I don’t think it’s any more strategic than that.”

The issue of participants staying in plans longer raises questions for the retirement plan advisement industry.

For instance, how does carrying these former employee accounts hinder, or at times help, a sponsor’s plan design and costs? How should plan advisers be guiding their clients to manage the trend? How will this impact the industrywide push into syncing up workplace retirement plans with individual wealth management once people, presumably, roll out?

Should They Stay or Should They Go?

Participants of all asset sizes want more personalization in their retirement saving and planning, according to industry surveys. They also, however, have an element of “human inertia” when it comes to rolling out of a plan to work with a financial adviser, says Craig Stanley, the lead partner of retirement plan consulting at Summit Group 401(k) Consulting, an Alera Group company.

Stanley suggests that, for some plans, the drawbacks may outweigh the gains when it comes to encouraging participants to stay in plan. Part of the concern, he says, stems from litigation fears from participants who are no longer employees.

“When we talk about how litigious our industry is and the liability that plan sponsors have, they’re only going to be so incentivized to want to try and keep terminated employees in their plans because they’re going to have to carry that potential liability,” he says.

Some clients, Stanley says, consider the “economies of scale” that see more participants bring the total cost of the plan down. But he does not see many employers actively looking to keep employees in plan for that purpose alone.

Brent Sheppard, a financial adviser and partner in Cadence Financial Management, agrees that most of his clients do not want to keep former employees in plan. But getting them to leave can be a challenge.

Sheppard says his firm sets up campaigns to contact and educate former employees about consolidating with a current workplace plan or rolling over into a third-party individual retirement account. The take-up rates, however, tend to be less than 25% for participants who respond.

“I’d say most of the responses from employees are: ‘No, I’m just going to keep it here,’” he says.

Doshier notes three hurdles remain for plan sponsors in keeping people in plan: fiduciary risk, administrative burden and the costs of running a larger plan.

However, there are also shifts in the industry that are making it, if not desirable, at least palatable to keep participants in plan, he says. Those are: price savings gained from greater plan assets; the desire for retirement plan committees to show long-time employees they care about them—and potentially keeping them on for part-time or contract work; and, finally, concern that advising people to roll out of the plan may start to raise fiduciary red flags if there is not a clear benefit to doing so.

“Whether the plan sponsor, the recordkeeper or the plan adviser on the plan want it or not, this shift [of people staying in plan] is happening,” Doshier says. “The participants are already doing it.”

How to Advise?

Stanley says his firm’s plan design has always accounted for those participants, generally of relatively fewer assets, who may stay in plan beyond their working years. The designs include various distribution options, including partial distributions or installment payments that can supplement Social Security in retirement.

“If [a participant’s] planning isn’t overly sophisticated, and they feel as though they don’t necessarily need the level of advice that they might receive with an individual adviser and an IRA, then let’s at least give them the chassis within the plan to be able to make the best financial decision for themselves,” Stanley says.

In time, Stanley believes, the industry will offer in-plan retirement income options, whether through annuities or via drawdown management that caters to individual needs.

Adviser Sheppard agrees with that shift to retirement income products but says the industry is “probably a decade away” from really instituting them. Retirement plan committees he works with are “open to the communication” about retirement income but are generally not interested in bringing them on, because committees are “focused on employees currently in the plan,” he says.

In the meantime, plan sponsors, particularly for smaller organizations, are seeking ways to keep costs down by moving to per-participant fees, Sheppard says. When recordkeepers will accommodate that setup—most common among payroll provider recordkeepers—some employers prefer it. That structure, of course, motivates them to get terminated employees out of the plan.

Whenever it comes to smaller terminated plans, both Sheppard and Stanley advise clients to set up automatic force-outs into IRAs so as not to carry participants on the books longer than necessary. The limit for force-outs will increase to $7,000 from $5,000 in 2024 as a result of the SECURE 2.0 Act of 2022.

Rollover Threat?

Rollovers into IRAs have been, for decades, a popular option for participants who either changed jobs or retired. According to the latest research from the Investment Company Institute, 60% of traditional IRA–owning households indicated that their IRAs contained rollovers from employer-sponsored retirement plans. Among households with rollovers in traditional IRAs, 85% indicated they had rolled over the entire retirement account balance.

That fact, in part, has driven the ongoing retirement plan advisement and wealth management convergence, in which firms are setting up the infrastructure to be partners both during the workplace accumulation phase and the individual management phase of the savings cycle.

This is partly why, Doshier believes, the industry is taking such a close look at people staying in plans.

“They’re trying to bring together a more holistic view of services that the retail customer—in this case a 401(k) participant—might need,” he says. “The real end game isn’t making sure that people have savings and debt services and solutions while they’re in the work world, but being there when they’re not.”

Doshier also sees the convergence as pushing advisories to figure out how to manage assets not just out of 401(k) plans, but within them. He notes that having access to an individual wealth planner through a workplace plan was “incredibly rare” about 10 years ago but is now much more common.

“We used to jokingly say around the water cooler [at a prior employer] that there’s only two segments of participants: the hunted and the ignored,” he says. “Anybody that didn’t have a significant account balance was ignored. I do think that that has fundamentally changed, in part from the investments in technology, but also this notion of convergence.”

Doshier notes pending changes to the Department of Labor’s Fiduciary Rule that may create stricter standards for advisers recommending rollovers. That, he says, could lead to the industry seeking better options and advice within plans.

Adviser Stanley does not see these shifts as a threat to the industry, but, rather, a natural progression that will serve the whole range of participants with more tailored solutions.

“If you’ve got a lot of assets, your planning may be more sophisticated than what a 401(k) would be able to provide you,” he says. “The rollover marketplace is always going to be there, especially for those employees and participants with larger balances that need more sophisticated planning.”