A growing number of retirees are leaving their savings in defined contribution plans — mainly 401(k)s — after they have stopped working instead of rolling them over into an outside account.
The trend is meaningful for advisors who are fiduciaries and have a potential new pool of client assets to guide. For advisors who charge fees based on assets under management, it raises questions on compensation and conflict of interest, retirement researchers say.
Indeed, 42% of participants had remained in their DC plans three years after retiring, which is more than double the number from 10 years ago, according to J.P. Morgan Asset Management’s 2018-2019 Retirement by Numbers research report.
The researchers also found those who stay in DC plans have higher account balances — on average, $156,000 versus $91,000 — and had a higher average beginning account balance and were higher earners than those who do rollovers once retiring.
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This seems “counterintuitive,” said Katherine Roy, managing director and chief retirement strategist at J.P. Morgan Asset Management, as it was thought that those with higher balances would be those who rolled their accounts over.
In 2016, about 45% of participants kept money in their DC plans for a year after retirement, according to T. Rowe Price. That jumped to 55% in 2019. As of 2018, 45% of participants two years into retirement kept their assets in the plans, while 35%-40% of participants did so three years into retirement.
The trend is visible, even if at the leading edge. When 2,000 investors were asked if they were interested in keeping money in their 401(k) plan if there were appropriate retirement products, 70% of baby boomers said yes, along with 76% of Generation Xers and 80% of millennials, explained Michael Doshier, T. Rowe Price’s lead retirement strategist.
He won’t say they are at a “tipping point” for this movement: The data shows that only 10% to 20% of DC plans have deployed a retirement income product within them, “so there’s still a product gap there,” Doshier said.
- Consultants who advise some $4 trillion in DC plans say they are focusing on retirement income products in plans, T. Rowe Price found.
- The passage of the Setting Every Community Up for Retirement Enhancement (Secure) Act is pushing more money into DC plans. Also, increasing regulation has pushed more advisors to become fiduciaries, which means they can advise on retirement plan accounts.
- Convergence, or the large crossover where retirement firms have been acquiring wealth firms and vice versa, has been growing. Where there was a lack of retirement advice in DC plans, that is changing. Advisors on the wealth side have historically tried to get that DC money to roll over while advisors on the plan side want it to stay. Due to this M&A crossover, however, “more advisors are playing both sides of that coin,” Doshier says.
- Plan participants also see advantages of staying in a DC plan, largely that they get institutional advice and lower costs.
- Plan sponsors weren’t as eager to hold on to participants after retirement as they weren’t set up for decumulation and potentially faced lawsuits due to benefits, rights and features clauses that held them back from developing specialized products for retired participants. Today, that is changing. Recordkeepers are smoothing out issues such as regular withdrawals from accounts. Although the risk of lawsuits is still there, there is more development of specialized retirement products. In addition, many of the fees on distributions have gone away, according to Doshier.
Michael Doshier, lead retirement strategist, T. Rowe Price:
There’s clearly still a challenge [for advisors] to being able to reach into plans and advise on those assets and get compensated. We haven’t ironed all this out.
If you’re an RIA business model and you’re a fee-for-service advisor on top of it, it’s no issue. That’s always been the case. But if you’re more of a traditional advisor that gets paid on assets, and there’s outside assets and inside assets, that hasn’t been completely ironed out operationally.