Since their inception, defined contribution retirement accounts like 401(k)s have been used primarily to accumulate wealth, with Americans generally rolling their plan balances into individual retirement accounts upon retirement.
However, the evolution of in-plan retirement income options is convincing an increasing number of retirees to stay in-plan.
This trend is the topic of a new report from PGIM’s David Blanchett. Modern defined contribution plans, as the report details, can offer access to attractively priced institutional investments while also providing professional fiduciary oversight. Likewise, affordable advice and additional services like financial wellness coaching can be available.
Employers continue to have a substantial influence on new retirees, the report finds, and big changes in workplace retirement plans could buck the longstanding rollover trend.
For example, 88% of respondents would stay in their 401(k) during retirement if they believed that their employer wanted them to stay and if the participant was extremely satisfied with the plan’s features. Only 28%, meanwhile, would stay if they were moderately satisfied with their plan and they thought that their employer wanted them to roll out assets upon retirement.
“In summary, [employers] play a significant role in whether DC participants stay or go in the DC plan at retirement,” Blanchett writes. “Today’s DC plans offer features that can protect retirement outcomes for millions of Americans, especially as the in-plan retirement income space continues to evolve.”
Source of IRAs' Growth
Citing data from Cerulli Associates, Blanchett’s report explains that the growth in IRA assets historically has been through rollovers from defined contribution and other qualified plans — not contributions.
“Total assets in DC plans stood at approximately $12.5 trillion as of Q4 2024, which is roughly double the total assets of the previous decade,” Blanchett says. “Cerulli expects total DC assets to increase to approximately $17.6 trillion by 2029. There has also been notable growth in IRAs, which exceed DC plans with total estimated assets of $17.0 trillion as of Q4 2024 and are projected to increase to $22.0 trillion by 2029.”
And while assets in traditional IRAs increased from $7.7 trillion to $11.4 trillion from 2018 to 2023, contributions are estimated to have represented only $100 billion of the total versus $3.1 trillion from rollovers.
“There are a variety of reasons employees decide to roll their DC savings into an IRA, especially with respect to retirees,” Blanchett reports. “For example, retirees often cite the desire to build portfolios with investments beyond what is available in the 401(k) plan, the desire to work more closely with a financial advisor, the benefits of consolidation, etc.”
Examining the Rollover Decision
Current workers’ opinions about staying in the plan are mixed, the report describes, although a relatively large number are at least considering doing so.
Overall, 38% of respondents said it was very or “extremely” likely that they would stay in the plan when retired, and 48% of respondents with a stated likelihood said it was very or extremely likely that they would stay in the plan.
“We can see a considerable difference in expected likelihoods based on the perceived employer preference,” Blanchett writes. “For example, 62% of all participants said they are very or extremely likely to stay in the plan if they believe that’s the employer’s preference. In contrast, only 34% of participants are very or extremely likely to stay in the plan if they believe their employer wants them to leave the plan upon retirement.”
Additionally, only 7.5% of participants either hadn’t thought about the rollover decision or didn’t know they had the option to stay in the plan when the perceived employer preference is for participants to stay in the plan. In contrast, this is 46.7% for those who aren’t sure of the plan sponsor’s preference.
“While these effects could be related, it suggests employers who provide a clear preference around rollover decisions can improve participant planning around what to do with their balance when they retire,” Blanchett says.
Similarly, participants' current satisfaction with the 401(k) plan has a considerable effect on whether they plan to stay in the plan during retirement.
“For example, only 10% of participants who are not at all satisfied with their 401(k) plan are very or extremely likely to stay in the 401(k) plan in retirement, while 60% of participants who are extremely satisfied with their plan are very or extremely likely to do so,” Blanchett reports.
Together, these findings suggest, Blanchett says, that current satisfaction with the 401(k) plan and perceived employer preferences are likely to drive rollover activity.
The Bottom Line
Among respondents who had decided whether they wanted to stay or go, 35% planned to stay in the plan. That number, Blanchett details, will likely increase as defined contribution plans continue to develop features that are attractive to retirees.
In addition, while there are not strong material differences in expected behavior by balance sizes, the probability of staying appears to increase slightly.
“The biggest difference by balance size is among those who effectively are unsure about what they are going to do … decreasing from 47% for those with balances less than $25,000 to 29% for those with balances of $250,000 or more,” Blanchett writes. “There were several reasons cited among participants who said they planned on rolling out of the plan.”
And those reasons do tend to vary by balance size.
“For example, only 30% of respondents who had balances less than $25,000 note working with a financial advisor as a reason to roll out, while 71% of respondents with a balance of $250,000 or more noted the same reason,” Blanchett writes. “The desire to consolidate accounts was the second most selected item, followed by the idea the respondent can’t accomplish the best possible retirement or build the retirement portfolio by staying in the plan.”
When asked what would make those who plan to depart more likely to stay in the plan during retirement, there wasn’t any prominent choice selected or notable differences among the options.
“Among the choices, though, the most commonly noted reason was ‘More flexible ways to take withdrawals,’ at 31% of all respondents, followed by ‘access to products or solutions that offer protected lifetime income,’ at 29% of respondents,” Blanchett finds. “Next was ‘More investments that can help me build a retirement portfolio that meets my needs,’ at 28%.”
While nothing suggests that one solution would keep those participants in the plan who were already planning to leave at retirement, sophisticated 401(k) plans aren't likely to kill the IRA rollover anytime soon, according to Blanchett. At the same time, he noted, there’s also clear evidence that workplace retirement plans are playing an increasingly important role in the typical American’s retirement experience.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.