Staying in-plan: More 401(k)s keep retiree assets but more products needed

More 401(k) plan sponsors like the idea of retaining participants after retirement, which is helping drive the development of more in-plan retirement income products, data published Friday by Cerulli show.

According to a survey of RIA aggregators and institutional retirement plan consultants, well over half — 58% — of their plan sponsor clients are actively encouraging workers to stay in the 401(k) after retirement rather than rolling their savings into individual retirement accounts.

“I’m seeing much more of a willingness among plan sponsors to allow participants … to leave the money in the plan,” particularly for those with at least $50,000, said Randy Long, founder and managing principal of SageView Advisory Group. “For many clients, the fees are so competitive in the plan … that it’s a very compelling place to leave your money for retirement.”

However, many 401(k) sponsors have done little if anything to make their plans more useful for retirees.

Two-thirds of retirement plan record keepers that offer a distribution option say it's a target-date series with an in-retirement vintage, according to Cerulli, which surveyed RIAs and record keepers in 2022. However, 95% of record keepers offer managed accounts, and half now include products with an annuitization component, with 44% using standalone annuities. Additionally, just over a third say they offer managed payout funds.

Annuities have become a much more common option in 401(k) plans following the Secure Act and guidance from the Department of Labor that clarified fiduciary duties around selecting and monitoring products and providers. But use by plans is still thin, as change in the retirement plan business is notoriously slow.

Data from the Plan Sponsor Council of America show that just over 8% of all 401(k)s included in-plan annuities as of 2021.

Despite efforts to make annuities more portable, there aren’t many compelling options on the market, and there is a conflict record keepers have in offering them in-plan, said Troy Hammond, CEO of Pensionmark.

“The portability is always an issue. I think we’ve been talking about this for 20 years,” he said. “I thought the product manufacturers would find ways to create portable decumulation solutions that could be actively marketed through different custodians.”

There are many good decumulation options outside of plans, but custodians and record keepers – who want to retain assets – are discouraged from offering many within 401(k)s, Hammond said.

“There is a paternal piece to what [plan sponsors] do. And if there was a way that they could help people through their decumulation phase, they would love to do that,” he said. “Right now most plans have nothing for [retirees]. It’s just asset allocation.”

Further, although more plans have become open to retaining participants, the numbers within Vanguard’s book of business show that it's still the norm to automatically cash out or roll out employees with low amounts of savings. According to that firm’s most recent How America Saves report, only 2% of plans retain participants regardless of their account balances, while 15% cash them out if the balance is less than $1,000 and 83% do so or initiate rollovers for balances below $5,000.

The idea of keeping participants in 401(k)s after retirement started percolating a decade ago, though plan sponsors are now more open to in-plan products to help facilitate that, said John Cunningham, executive vice president of retirement and executive compensation benefits at Alliant Retirement Consulting.

“None of them usually wanted in-plan solutions — that’s a change,” Cunningham said.

Even though more in-plan annuities have been developed by insurers, only about 5% of plans advised by Alliant have opted for annuities, he noted. About two dozen of more than 300 401(k)s the firm works with have at least considered them, he said.

“There’s just more holistic awareness with drawdown strategies. Social Security is one of the key questions … and the other is where should you start withdrawing your assets first,” Long said of the balance between IRAs, 401(k)s, personal assets and other sources. “More and more, participants are engaging a financial professional to help them make those decisions.”

More record keepers have been updating their systems to allow periodic withdrawals from accounts, though more need to do so, he noted.

There's more interest in managed accounts, and that trend is driven at least in part by plan advisors with a wealth business who want rollover assets, Cunningham said. W

ith record keepers simultaneously trying to retain assets, plan sponsors are pulled in different directions, he said. “There may be a cottage industry of advisors who focus on this, who are conflict-free and are a fiduciary.”