New research shows retirees are bailing on 401(k)s earlier

Oct 28, 2012 @ 12:01 am

By Darla Mercado

The window of time during which employees pull their money out of their retirement plans is shrinking, prompting financial advisers to prep future retirees for rollovers a little earlier.

A new analysis by JPMorgan Chase & Co. of 1.8 million retirement plan participants concluded that last year, just 17% of them continued to hold assets in their 401(k) three years after retirement, down from 19% in 2008.

The data suggest that more retirees are taking their money and bailing from their plan even sooner after they stop working than used to be the case.

For instance, similar data from The Vanguard Group Inc. in 2010, studying a group that retired in 2004, showed that after five years after they leave their plan, about 20% of both retirement-age participants and their assets remain in the plan.

EARLIER CONVERSATIONS

In some cases, employees begin taking withdrawals before they stop working, according to Dan Oldroyd, vice president and portfolio manager with JPMorgan's Global Multi-Asset Group.

“People start taking lumpy withdrawals at age 59.5 because the [10%] tax penalty goes away,” he said. “There's a definite trend in people not sticking around in the plan.”

As a result, advisers are having earlier conversations with working clients, sketching out a plan for their 401(k) assets before the time comes for a distribution or a rollover. Education is a major component of those conversations, getting workers into the mindset of living on a fixed income during retirement.

“We're definitely doing more targeted meetings, focusing on the 55-plus group,” said Joe Connell, managing director at Sheridan Road Financial LLC, which works with plan sponsors on retirement plans.

Those discussions with aging employees focus on raising awareness of longevity during retirement and plotting the costs of health care. Workers realize far ahead of time that their savings need to last them at least 30 years.

“We want them to understand what they're looking at in terms of expenditures,” said Mr. Connell, noting that fewer than 10% of these retirees keep their assets with the plan once they exit the workforce.

SEVERAL FACTORS

Advisers working with retail clients note that there are a handful of factors that drive retiring employees' flight from their plans. Among them is the desire to have full control of their savings and the ability to invest in instruments that might not have been available in the 401(k), but they also harbor fears of what could happen should their employer run into financial difficulty.

Rich Zito, co-founder of Flynn Zito Capital Management LLC, said that after the dot-com bust, the firm had a handful of clients who were working for companies that went under.

In one situation, it took an affected client close to nine months to get his 401(k) assets from the employer.

“That's not to say that many people are in that situation, but why leave the money there if you don't have control of the funds?” Mr. Zito said.

In other situations, employers are in a hurry to get workers out of their plans, as they would rather not have any fiduciary responsibility over assets that belong to retirees, said R. Craig Byrd, president of Byrd Financial Group LLC.

Most of his firm's retiring clients opt to roll their 401(k) savings into an individual retirement account, and they generally want out of their employers' savings plan within 30 days after they stop working, he said.

“I don't know anybody who's left their money at the 401(k), because of the lack of flexibility and quick response time,” Mr. Byrd said. “[Retirees] also want someone they can talk to face to face.”

Finally, in situations where employees are in a plan that uses a group annuity, a rollover could save money on administration and wrap fees, even with the same underlying investments, said Austin A. Frye, founder of Frye Financial Center.

Still, he said that in the years leading up to the rollover, he gets clients used to the fact that though they were once able to take a little more risk with their 401(k) savings, they will have to become more conservative.

“Even in poor markets, you're investing in lower prices, and it lends itself to being a little more aggressive, but when employment ends, we go to something a little more defined and finite,” Mr. Frye said. “This sum of money is all that there is.”

dmercado@investmentnews.com Twitter: @Darla_Mercado

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