The Full Potential

Historically, many plan sponsors have, on the whole, ignored participants retiring and leaving the plan. Yet, there is a growing recognition by some plans of the benefits of keeping retirees enrolled instead. As they typically have larger account balances than do their younger counterparts, they can help the plan maintain its scale, allowing for better pricing for the plan overall. 

More than three-quarters of plan sponsors now prefer to retain retiree assets in their plans, according to the 2022 PIMCO US Defined Contribution Consulting Study, a rate that has been steadily growing since 2015. 

But the financial needs of retirees are more heterogeneous—and more complex—than those of working participants, says Joshua Schwartz, president of Retirement Plan Advisors in Chicago. And, while 401(k) plans may offer institutional pricing, they are also typically more limited in terms of the investment menu and flexibility for making withdrawals than are the products and services the retiree might find in the retail space.

“So, plan sponsors today are looking at how they can create appropriate solutions that allow people to do what they need to do in retirement within the plan,” Schwartz says.

Such solutions might include professionally managed investment accounts that may be customized to the individual participant, whether to meet accumulation or decumulation/ income-replacement needs, he says. Plan sponsors are also considering providing all participants with access to basic financial planning, including actionable recommendations. 

The subject of supporting retirees is among the top five topics that come up during client conversations, says Nathan Voris, director, investment insights and consultant services at Schwab Retirement Plan Services in Richfield, Ohio. Yet, while plan sponsors are interested in learning more about lifetime income and other solutions for their retiree participants, many are not yet ready to implement these options. 

“We’re in a wait-and-see phase, where everyone is still trying to figure out the optimal solution,” Voris says. “I don’t think there’s a playbook yet for what type of income solution is best for XYZ type of plan. Everyone is still trying to figure It out.”

Voris compares the conversations to those that occurred in the industry during the early days of target-date funds, before they became widely adopted. Just as consultants, advisers and recordkeepers spent years doing research and due diligence to feel comfortable recommending the funds, they need to do the same with products for retirees such as annuities, fixed-income funds and target-date payout funds. Historically, plan advisers have not had staff dedicated to such work. 

Concerns Remain

A 2022 report from Alight found that two-thirds of plan sponsors had operational or administrative concerns related to offering in-plan annuities, and nearly 60% had fiduciary concerns. More than half of plan sponsors in that survey said they were waiting for the in-plan annuity market to evolve.

Still, Voris expects the momentum to pick up, especially if the proposed SECURE Act 2.0 legislation—which serves as an addition to the Setting Every Community Up for Retirement Enhancement Act of 2019—includes provisions making it easier for plan sponsors to offer lifetime income products within their plans. He says companies are also looking at other solutions, including financial planning, Social Security, and health-care optimization tools, as well as a distribution strategy to build a retirement paycheck. 

“There’s a recognition that we now have a demographic that’s been in a 401(k) plan for some or all of their career and have [saved] significant assets over that time,” Voris says. 

Some plan sponsors might also see providing a “cradle-to-grave” solution as a competitive advantage in a tight labor market. “As we have seen an unprecedented level of turnover during the pandemic, employers are looking for ways to provide unique and differentiated benefits—communicating to employees that their long-term financial security matters can be compelling,” says Kathleen Kelly, managing partner in Compass Financial Partners, a Marsh & McLennan Agency LLC, in Greensboro, North Carolina. “Providing a plan design that can support retirement spending is attractive.”

In addition to retirement income products, plan sponsors are also asking advisers about advice and financial wellness offerings targeted to retirees, says Steven Johnian, a manager with the strategic retirement solutions group at the Commonwealth Financial Network in Waltham, Massachusetts. 

Demographics Count

The retirement solutions that plan sponsors select may vary significantly, depending on the demographics of the employer’s workforce. The lowest paid, for example, are apt to replace a larger portion of their income with Social Security, while the highest paid might not need to replace all of their income for retirement.

“So we need to help the plan sponsor think about who it wants to help,” Schwartz says. “Overall, it’s very hard, and expensive, to be all things to all people. Many working Americans who are at risk relative to retirement would benefit from basic financial planning. And they don’t have money or investable net worth to purchase it themselves.”

Meanwhile, most high-income workers are less at risk and also have access to resources outside of the plan, he adds. 

That said, long-term employees may have another incentive to keep their assets in-plan.

“Participants who have worked for a company their entire career, or close to it, have a comfort level and familiarity with their retirement plan, making it much more appealing to stay,” Kelly says. “Generally speaking, change is hard. We know that participants are most affected by their sense of inertia, so it’s crucial for the employer, as plan sponsor, to put solutions into place that help put them on the most likely path for retirement success.”

Aside from demographics and expenses, the decision of whether to support retirees often simply comes down to the plan’s philosophy. “Some employers’ goal for their plan is to help people accumulate money before they leave, but other employers believe the goal is to help people have a financially stable retirement with consistent income for life,” Schwartz says. “In that case, not supporting retirees is a disconnect from the mission statement. I don’t think there’s a right or a wrong answer.”

“Aside from demographics and expenses, the decision of whether to support retirees often simply comes down to the plan’s philosophy.”

Different Levels of Support

At a minimum, plan sponsors should be offering retirees information about their options with regard to their plan balance when they retire, including the option to either roll it out of the plan or keep it in and take advantage of benefits such as in-plan annuities or managed accounts, if those are available, Johnian says. 

Plan sponsors that want to do more can leverage their adviser to connect with retired participants regularly to help them understand, and make ongoing decisions about, their account, Johnian says.

Advisers, in turn, can play an important role in helping the plan sponsor determine what its retirees need. To do that, they will need an understanding of the products available in the market now and which one might be the best fit for the particular plan, Voris says.

“Most advisers will approach the conversation with data,” says Johnian. “They’re going to look at ‘How many retirees are there?’ and ‘When’s the last time we spoke to them about what their needs are?’ If [the sponsor] wants them to stay in the plan, it’s about providing terminated participant services, and there isn’t much substitute for that besides rolling up your sleeves and trying to connect with those folks.”

Conversations with the plan sponsors should focus on the capabilities of their recordkeepers, including whether they can administer the distribution options that retirees might want or need, Schwartz says. For example, even if they do not purchase an annuity, retirees may want to be able to make regular withdrawals from their account without racking up fees for each transaction. 

Providing Advice

Advisers can also help with advice for retirees who want guidance on a drawdown plan that maximizes their ability to spend in retirement without running out of money and minimizes taxes. Such guidance may require more personalization than does accumulation advice, as other factors—e.g.,  outside assets and medical expenses—may come into play. 

“Retirees really need help figuring out how to draw down their money,” says Peg Knox, chief operating officer of the Defined Contribution Institutional Investment Association. “They want to know how to [do that], which dollar should they take first. Having that advice in the plan is super helpful to retirees.”

Whether the sponsor deliberately encourages its  retirees to remain in-plan or not, it, along with its adviser, still has a fiduciary responsibility to those participants, Voris says. So, as a sponsor considers offering additional products or services to retirees, it must also do so from a fiduciary perspective.

“There’s no question that plan sponsors supporting retirees are creating another level of responsibility for themselves,” Schwartz says.

Besides the fiduciary obligation, plan advisers also need to help sponsor clients think through the logistics of serving retirees, who are likely to move and drop out of regular contact with the former employer. 

“If you’re a large company and you have people everywhere, trying to coordinate a seminar is not going to work,” Johnian says. “How do we leverage technology in a virtual or automated way to reach those folks?” 

While technology has made this easier, retirees tend to become less comfortable with its changes as they age, Johnian says. Like other plan participants, they are prone to inertia and may lose motivation to remain engaged with the plan.

A Question of Value

Of course, to add on such services, sponsors will have to pay their adviser more—typically from plan assets—or hire a new adviser, Johnian says. They will need to consider whether that route will ultimately add value to the plan over time, he notes.

For advisers, servicing retirees requires a different set of conversations and skills than they may normally use, Kelly says. That may mean creating new content for wellness programs and new scripts for participant conversations.

“Advisers are used to focusing their efforts on accumulation and talking to people about the benefits of saving and investing to grow their assets,” Johnian says. “It changes when we talk to retirees. They don’t care about any of that. They just want to know if they have enough money and if it’s invested in a way that lets them spend it down and create X% of their income every year.”

‘All Fiduciaries to the Plan’

Part of the business model for many advisers concerns helping retirees with wealth management services, or even encouraging them to roll over their 401(k) assets to the adviser’s firm. With more plan sponsors looking to keep retirees in-plan, that can create a conflict of interest, but experts say it is a manageable one as long as advisers and sponsors focus on transparency and their fiduciary duty.

“We are all fiduciaries to the plan, which means we have a duty of loyalty to it and, by extension, to the participant,” Schwartz says.

That fiduciary duty comes into play when plan advisers help the participants make decisions about rolling over their assets. There is a recognition from both the adviser and sponsor that, in some cases, in-plan solutions work well for retiree participants, but, in other cases, at least right now, there is a need for greater customization. 

The key is makings sure that the sponsor, adviser and recordkeeper agree on the circumstances in which a participant might be better served outside the plan. 

“Sometimes the recordkeepers need to take off their recordkeeping hat, and asset managers need to take off their asset management hat,” says Voris. “And everyone needs to take a step back and think about the best approach for the participant.”

Many solutions exist that could be used to help retirees, but these are not always offered within a retirement plan.

“There are a lot of plan resources—from financial planning to counseling to guaranteed products—that have been [around] for a long time,” Voris says. “Sometimes, recordkeepers and advisers are trying to solve it in-plan without looking at the whole universe of solutions.”

More Options Coming

Schwartz says he expects more options—including non-annuity income solutions—that can serve all the financial needs of in-plan retirees.

“In the same way that managed accounts have a fee for personalized solutions, maybe the same thing happens in the retirement space, and we could price it institutionally and make it more affordable,” he says. “There’s a significant financial planning component that they need.”

Voris agrees that the quality of in-plan options will continue to improve for retirees over the next few years. “Most plan sponsors really care about their employees and participants, and they see this as something that would add substantial value,” Voris says. “Plan sponsors may be well-suited to provide that type of service through their recordkeeper or adviser.”

Art by Julien Posture