Retirement Plans Add Flexibility to Keep Assets Put After Leaving Work

Nearly three-quarters of defined-contribution plan participants aged 60 and older leave their employer’s plan within five years after separating and roll those assets to an IRA.

Do terminated employees have enough incentives to stay in an employer-sponsored plan?

Nearly three-quarters of defined-contribution plan participants aged 60 and older leave their employer’s plan within five years after separating and choose to roll those assets to an individual retirement account (IRA).

This has raised several questions among policymakers, plan sponsors and recordkeepers, according to Vanguard. Among them is whether the glide paths (how the allocation evolves over time) of target-date funds should be based on a planned retirement date or on an approach that covers retirement years. Also, should plans offer features that will help participants convert their savings into income streams?

Plan distribution behavior as of year-end 2021

A Vanguard analysis of distribution behavior of defined-contribution recordkeeping clients from January 2011 through December 2021 reported that seven in 10 of this age group held assets in a tax-advantaged account and nine in 10 dollars were held in employer plans or IRAs. Those with smaller comparative balances were more likely to cash out. To this point, three in 10 participants who cashed out had an average balance of $39,700.

Those with larger average balances, ranging from $239,000 to $418,900, were likely to continue in the plan, roll to an IRA or both. Increased withdrawal flexibility could be the reason more recent retirement-age participants are staying put in their plans. Most retirement-age households that own IRAs had no withdrawals until the required minimum distributions (RMD) rules kicked in.

Vanguard argues that its findings suggest target-date funds should assume plan participants “will remain invested into retirement” when setting their glide paths. Other features that could help retirees stay in a plan include allowing ad hoc distributions, providing installment services, eliminating age restrictions and permitting asset rollover into the plan for terminated participants.

Source: “Retirement distribution decisions among DC participants,” by Jeffrey W. Clark and Joseph C. Walsh; Vanguard, February 2023.