DC plan participants are increasingly keeping their retirement balances in the plan after they retire, but plan sponsors interested in retaining those balances must overcome some misperceptions, according to a recent paper by T. Rowe Price.
In “Bridging the Gap Between Accumulation and Decumulation for Participants—A Guide for Plan Sponsors,” the firm’s data shows, for example, that in 2012, 45% of account assets remained in plans at least a year after retirement, but that figure jumped to 61% in 2018.
Research by the firm also shows that many plan sponsors have signaled a desire for their plans to become “destination accounts” where participants aggregate assets and keep them there throughout their retirement. In fact, T. Rowe Price found that fewer than 6% of sponsors with plans greater than $500 million indicated a desire for retiring participants to leave their plans, while half of the same group of sponsors expressed a “clear preference” for participants to stay in their plans into retirement. But first, plan sponsors must work to overcome some misperceptions that participants have.
To explore these emerging trends, the firm worked with aQity Research & Insights to conduct six focus groups between June 24 and July 1, 2019 in Arizona, Georgia and Illinois to better understand the decision-making process of preretirees and recent retirees. The 39 focus group participants were between the ages of 45 and 70 years old; either recently retired (past 1-5 years), soon-to-be retired (next 1-5 years) or older Gen X participants (5+ years from retirement); and participated in a 401(k) plan offered by a large employer (5,000+ employees) and had 401(k) assets between $100,000 and $1 million.
According to the findings, participants apparently have misperceptions about the value of staying in plan and many of the focus group participants did not even realize that they could keep money in an employer-sponsored retirement plan after they retired.
“What we learned was quite surprising, and in some cases represented a disconnect from reality,” writes Lorie Latham, Senior Defined Contribution Strategist at T. Rowe Price and author of the paper.
One common area of misperception centered around the cost associated with an employer-sponsored plan, according to the focus group findings. When participants were asked if they thought fees were higher inside or outside their DC plan, some of the often-incorrect sentiments included:
- in-plan DC fees are higher;
- there are “a lot” of hidden fees;
- DC plans have extra fees that do not exist at the retail level; and
- employers do not care about lowering fees.
The firm also heard misperceptions about plan sponsor motives related to DC plans, including that they may not be looking out for their participants’ best interests or that they may be receiving kickbacks.
“These misperceptions really got our attention,” writes Latham, who further notes that what became clear from the focus groups is that sponsors may not be getting credit for acting with participants’ best interests in mind.
An additional finding from the focus group discussions was that retirement plan participants are looking for help as they move from a “saving mindset to a spending mindset.”
“We learned that the range of how individuals feel about whether they are ready for retirement varies quite a bit,” writes Latham. “Some said they felt ready. Others felt uncertain. And many said they were struggling with the idea of drawing from retirement savings after working for years to grow their balances.”
Consequently, they go to multiple sources to find help and information, with mixed results, the paper notes. For example, during the focus groups, the firm heard from one recent retiree who had a very positive retirement experience and the plan sponsor was the driver of the positive outcome, while another participant indicated that his advisor hadn’t performed any of the services described and an additional participant described predatory practices toward preretirees.
“Participants approaching retirement age are inundated with information and even ‘advice’ from sources outside their plan, but the quality of this information and advice can be uneven, misguided, or ill-informed,” Latham observes. “If plan sponsors want to maintain retirees in plan, they should not keep it a secret. It’s crucial that they engage with participants early and often,” she emphasizes.
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