Recent Vanguard research explores the impact of decumulation in employer-sponsored retirement plans, finding that having key features in place ultimately supports savings.
The research, which surveyed 504,400 retirement-age plan participants ages 60 and older who terminated employment, analyzes how “retiree-friendly” plan designs, including financial advice, institutional pricing, and investment accounts can safeguard retirement savings.
According to the findings, nearly seven in 10 retirement-age plan participants have preserved their savings in a tax-deferred account. Nine out of 10 retirement dollars were also preserved in an individual retirement account (IRA) or employer plan account.
While Vanguard’s research does state that most defined contribution (DC) plan participants leave their employer’s retirement plan for an IRA within five years of termination, employers who add flexible distributions are likely to see these participants and their assets remain in the plan.
Of the three in 10 retirement-age participants who cashed out from their employer’s retirement plan after five years, most generally held smaller balances. The average amount cashed out was $39,700, whereas participants who preserved their assets had average balances ranging from $239,300 to $418,900.
A call for more conversations around decumulation
Dave Stinnett, head of Strategic Retirement Consulting at Vanguard, says the research underscores the significance in applying decumulation strategies to 401(k) plans. While accumulation options are vital to plan growth, distribution features can retain retirement assets for a longer period.
“Plan design matters in the decumulation phase as well as in the accumulation phase,” he said in an interview with 401(k) Specialist. “Those plan sponsors who have added features like in-plan advice, the ability to take flexible distributions, or having a good retirement income solution achieve better outcomes and help to keep people in the plan.”
Retirees have long needed help drawing down their retirement savings in an manageable, yet consistent strategy—otherwise known as decumulation or income planning. Some have even called for “auto decumulation” in an effort to personalize distribution strategies for participants.
It’s up to the plan sponsors and advisors to apply decumulation features and teach their participants the advantages of staying in their employer’s 401(k) plan, says Stinnett. On top of avoiding any complexity with rollovers, administrative fees and investment expense ratios are generally cheaper than what participants would pay in an IRA.
“Financial advisors should be talking to plan sponsors and saying, it’s probably in your employees’ interest and it’s probably in your interest as an employer to keep these high-balanced retiree participants in the plan,” he said. “It keeps expenses low, and it preserves a good deal for the employees.”
“Look to add flexible distribution or withdrawal options, and lastly, make your retirement age employee population aware of these features in the plan, so they can defer their money in the retirement plan,” he continued.
More choose to remain in plan
As more plan sponsors begin to have conversations on decumulation strategies, the Vanguard research found a higher number of participants and assets are remaining in their employer-sponsored plan.
According to the findings, 29% of plan participants remained in the plan with no installments, compared to just 3% in 2011. While it’s not as much as the 38% who still chose to rollover their assets (relative to 57% in 2011), the growing number indicates an increased awareness of the benefits with staying in the 401(k) plan.
The same could be said with the amount of assets rolled over vs. remaining in plan. Vanguard’s research shows 48% of assets in 2020 remained in their former employer’s plan, compared to 20% in 2011. Rollovers almost tied at 47% in 2022, compared to 68% over 10 years ago.
Additional findings from Vanguard’s research can be found here.
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