A new study on DC plan participant activity found a sharp jump in the number of participants staying in their plans after they retire.
Findings from J.P. Morgan Asset Management’s Retirement by the Numbers research reveal that 42% of participants are leaving balances in their DC account in the three years following retirement. This is up significantly from 28% in 2018 and more than double the percentage in 2009 (20%).
Further supporting the view of staying in a plan, the firm’s 2021 participant survey found that as many as 85% of respondents said they were at least “somewhat likely” to stay in their plans after retiring if there was an in-plan retirement income option. In contrast, the firm’s earliest studies showed that most participants withdrew all their plan assets within three years of retiring.
At the same time, retirees’ income needs as they transition into retirement are higher than conventional wisdom suggests and do not remain constant but decline with age, the study notes. J.P. Morgan found that retirees are spending at higher-than-expected levels in the early years of retirement, and suggests that retirees should plan on needing to replace more than 90% of their working income at retirement. The firm notes that this is a significant increase from the widely accepted 70% to 80% standard. This number decreases gradually in retirement, to 70% at age 85.
This new report combines the firm’s “Ready! Fire! Aim?” research with insights into household spending patterns to provide a comprehensive view of how individuals are using their DC plans as a savings vehicle and how they are also spending as they move through retirement.
Contribution Rates and Withdrawals
Meanwhile, most people are still not contributing enough to reach safe funding levels, with average starting contribution rates beginning at 5% and never reaching 10% before retirement, according to the report.
“We can see from the first Retirement by the Numbers report that retirees need much more in savings to accommodate higher-than-expected spending needs in retirement,” says Katherine Roy, J.P. Morgan Asset Management’s Chief Retirement Strategist. “In light of these findings, it’s critical that plan sponsors consider incorporating features such as automatic contribution and escalation to increase lagging contribution rates.”
Roy further notes that as more participants keep assets in plans post-retirement, tools to help participants spend down in retirement will prove increasingly valuable.
The research also found that modestly fewer working participants over the age of 59½ are taking pre-retirement withdrawals, though the number is still notable and the size of the average withdrawal amount remains large. A range of 6%–10% of participants over the age of 59½ withdrew, on average, 55% of assets, the study notes.
Implications
J.P. Morgan notes that the findings have several implications for DC plan and target date fund glide path design. For instance, the firm suggests that plans can help participants help themselves through the broader use of automatic contribution and escalation programs at much higher starting levels and increase rates than typically used today. In fact, the firm’s biennial participant survey published earlier this year revealed that participants largely think they should be saving more than they are. Moreover, almost all of those who were auto-enrolled with auto-escalation reported being satisfied with that approach.
Plan sponsors should also consider how these behavioral trends are likely to interact with their TDF selections to better understand the type of glide path designs that may best position participants for retirement funding success. The firm suggests that the average participant needs a much higher savings balance to realistically reach at least a minimum level of adequate replacement income.
Based on its understanding of the saving and spending patterns of plan participants, the firm notes that it plans to evolve the glide path across its SmartRetirement suite of target date funds, increasing equity allocations while maintaining broad diversification and de-risking in the years leading up to retirement.
Additionally, as more participants use their plans as investment vehicles post-retirement, it is important to consider how the distinct accumulation and decumulation phases work together, to help enhance the participant experience.
The research draws upon actual saving and withdrawal patterns from approximately 4,500 DC plans with more than 1.4 million participants. Retiree spending data comes from more than five million de-identified J.P. Morgan Chase Bank households.
- Log in to post comments