The defined contribution (DC) industry has made substantial strides in helping plan participants through the accumulation phase, but decumulation is a separate story, and plans “are not typically designed to effectively support participants through their retirement years.,” according to Cerulli Associates.
The firm finds that many larger plan sponsors express an interest in retaining the assets of retired participants and, providers relay that some of their larger plan sponsor clients are actively seeking to make their plans more retiree-friendly.
According to the research, 84% of 401k plan sponsors with greater than $500 million in assets prefer to keep participant assets in the plan during retirement. Increased scale provides leverage to negotiate favorable pricing arrangements with asset managers and other providers.
Meanwhile, participants maintain access to institutionally priced investment products and services during their retirement years.
Cerulli suggests retiree-friendly DC plans could serve as attractive retirement destinations for retirees in the lower end of the mass-affluent market ($500,000 to $2,000,000 in investable assets), middle market ($100,000 to $500,000), and mass-market (less than $100,000).
The plan design changes necessary to make DC plans attractive retirement destinations call for coordinated efforts between plan sponsors, consultants, recordkeepers, asset managers, and other retirement providers.
“Retiree-friendly plan features should arm participants with the planning tools, personalized advisory services, investment products, and withdrawal options necessary to support participants through their retirement years,” Shawn O’Brien, senior analyst, said in a statement.
A full 56% of retirees across all age and wealth tiers indicate that the ability to withdraw funds as needed is the most important feature of a retirement account.
“Plan fiduciaries should ensure their documents allow for flexible, inexpensive distributions and a recordkeeping platform that can smoothly facilitate monthly, quarterly, ad hoc, and partial withdrawals.”
Fiduciary expertise needed
Executing decumulation-focused plan design changes will require plan sponsors to work with their fiduciary partners, asset managers, and recordkeepers to ensure participants have an investment opportunity set necessary to construct an effective investment and drawdown strategy in retirement.
A likely outcome is increased innovation in in-plan decumulation solutions, such as DC-managed accounts, Cerulli notes.
“Over time, we think the decumulation experience in retiree-friendly plans will begin to more closely resemble the out-of-plan, retail advisory experience for many retirement investors,” O’Brien concluded. “As new plan design offerings materialize, asset managers and insurers should proactively communicate the value proposition of their income-oriented investment products and illustrate how these products can help retirees achieve superior financial outcomes in an in-plan setting.”