401(k) plans started out as supplemental savings plans, but are now the primary retirement plan offered to American workers by their employers. Most 401(k)s today are designed to help participants save and invest money for retirement – but are less focused on how to help those folks once they actually retire. This shortcoming of the original 401(k) concept is now actively being addressed by employers and plan administrators who have realized there is tremendous upside for both plan participants and sponsors when retirees remain active participants in the plan. To encourage “remainers,” 401(k) plans are transforming to include a retirement tier specifically designed to meet the varied needs of individual retirees. II recently sat downwith Toni Brown, CFA, senior retirement strategist at Capital Group®, to discuss the evolving best practices for an effective retirement tier and why retirees should stick with their 401(k) plan.
How do 401(k) plans need to evolve to be ideal for participants staying in them after retirement?
Participants remaining in the plan during retirement should be able to make flexible, systematic withdrawals, provided at a reasonable fee, over a period of time. Further, participants should have access to investment options that are managed specifically for them when they are in retirement and taking these systematic withdrawals. Investing retirement funds when periodic withdrawals are being taken is very different from investing when periodic contributions are being added. Taking money out rather than putting money in is a game changer from an investment perspective, in part because the risks of market declines and volatility become significantly more important. A 401(k) plan can offer investment options that are designed for retirees and that are liquid, durable, and understandable. Plan sponsors could also consider offering an annuity bidding platform out-of-plan so participants have reasonable access to guaranteed income options. Ultimately, providing retirees with access to guaranteed income out-of-plan, appropriate withdrawal options in-plan, and ensuring that the plan offers reasonable systematic withdrawals can go a long way toward creating an effective retirement plan.
Can you expand a bit on why systematic withdrawals are important to staying in the plan after retirement?
Consider a defined benefit plan where monthly payments are made to retirees. Retirees expect those payments to be regular and consistent … similar to a paycheck. Now that defined contribution plans are the primary retirement plan, they need to function in a similar manner. Retirees should be able to determine a percentage they need to withdraw to, in a sense, mimic a paycheck. If a retiree decides they need to withdraw 4% of their retirement savings each year, they should be able to customize how that comes out of the plan. They might withdraw the entire 4% at the beginning of each year. Alternatively, they might take 1% at the beginning of each quarter, or have it distributed monthly. The goal is to allow retirees access to their retirement savings in a consistent and regular manner so they can fund their retirement living.
Assuming those options are made available, what else might entice participants to stay in the plan post-retirement?
Fiduciary oversight and lower fees are excellent enticements for participants to stay in their plan after retirement. The plan sponsor is the fiduciary who monitors the investments and makes changes when appropriate. The investment options are likely to have lower fees through institutionally priced investments.
How does a plan sponsor benefit by offering an effective retirement tier option?
Offering a 401(k) plan that can be used to save for retirement and then used in retirement is unusual today – and such a plan could be positioned as a very valuable tool for recruiting and retaining talented employees. An effective retirement plan is a meaningful way for employers to demonstrate a long-term commitment to employees. It is also probable that there would be a benefit from cost-effective administration because the greater the assets of the plan, the lower the per-participant costs to manage it.
Is the retirement tier concept coming too late to help plan participants currently nearing retirement?
It is definitely not too late! Participants nearing retirement today can benefit from having a retirement tier and being able to remain in the plan. Regardless of the amount of money saved – and, certainly, more is always better – the retirement tier can help participants in retirement understand and invest their assets.
How important is a retirement tier on a societal level in the U.S.?
An effective retirement system for working Americans is important. A retirement tier can help transform defined contribution plans, such as 401(k)s, from mere supplemental savings plans to fully evolved retirement plans. Well-designed retirement plans are foundational to the success of retirees, and their success is good for all of us.
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