Retirees Holding Onto 401(k) Savings

The majority of retirees pull money out of their workplace retirement accounts but roll over the assets to other accounts, likely to fund retirement withdrawals, according to a Vanguard study.

Vanguard analyzed the behavior of nearly 250,000 retirees to determine what they did with their defined-contribution plan [e.g., 401(k)] assets. The majority of retirees pull money out of their workplace retirement accounts but roll over the assets to other accounts, likely to fund retirement withdrawals.

The findings are based on a study of retiree behaviors over the 10-year period of 2004 through 2014, dividing the retirees into 10 single-year groups, or “cohorts.” The study looked at participants of defined-contribution plans sponsored by employers that used Vanguard’s retirement plan recordkeeping services. As such, the mutual fund company was able to determine what retirees did with their workplace savings following the termination of employment.

Between 50% and 60% of participants rolled their workplace savings over to an individual retirement account (IRA). Of those retired for at least five years, only a small number kept their savings in their former employer’s plans. The proportion increases for newer retirees, though just 25% of those who retired in 2013 have kept their retirement dollars in their former employer’s plans. Vanguard says one reason for the large number of rollovers is the inability to make ad hoc withdrawals from many defined-contribution plans.

Retirees who stopped working in 2004 are holding onto their balances. Vanguard says that about 90% of retirement savings dollars have been preserved through the end of 2014. This estimate is likely low, as some workers who took their account balance in cash have preserved their savings. Retirees in the other nine single-year cohorts are showing similar behavior.

This behavior has implications for retirement savings. First, it suggests the need to allocate through retirement, which means the allocation will continue to evolve well into retirement. Secondly, according to Vanguard, products designed to help transition portfolios into streams of regular income need to be developed and made available with defined-contribution plans.

Vanguard was unable to track the decisions made by retirees who rolled assets over to IRAs. However, based on surveys by other firms, Vanguard believes IRA withdrawals are infrequent until the required minimum distribution rules begin to apply.

Source: “Retirement Distribution Decisions Among DC Participants—An Update,” Jean A. Young, Vanguard Research Note, September 2015.

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