Interest Grows Among Employers in Retaining Retiree Assets In-Plan

(PlanSponsor) - SHOULD EMPLOYERS ALLOW retiree assets to stay in-plan or should the assets go when a worker’s employment has ended?

Employers are grappling with the clash of long-standing retirement trends, considering whether to allow or encourage workers and their defined contribution assets to stay in-plan when workers retire.

There is growing interest from employers in retaining the assets belonging to retired workers because permitting participants to keep the monies in place can accrue benefits to both the employee and retirement plan sponsors, according to sources.  

“In the past, it’s been more about encouraging participants to move the assets out, thinking that was less administrative costs, less exposure to [fiduciary] liability, those kinds of things,” says Judy Bobilya-Feher, chief financial officer at Aunt Millie’s. “A recent conversation has been on—as we start looking more at that time period of readying [pre-retirees] for retirement—coming up with the annuity or income solutions and such.”

A change at Aunt Millie’s to retain assets has been discussed, but the employer has not implemented one. At least not yet, adds Bobilya-Feher.  

One driver of accelerated interest was the onset of the COVID-19 pandemic and the resulting economic effects and impacts. That accelerated actions by some employers to focus greater resources on retention of employees and to care for workers, Bobilya-Feher adds.

Exploring a change to retain retiree assets in-plan is also about taking greater care of the workforce generally, she says.

”COVID-19 has pushed a lot of employers—with the Great Resignation, all the labor issues—to have to show more empathy with their employees,” Bobilya-Feher says. “That starts begging the question: We need to have better retirement solutions, better retirement education, maybe some Social Security education, and why should we push the assets out?”

Why Do it?
There are several reasons employers are interested in retaining retirees and their assets in-plan. Primarily, plan sponsors want to continue to benefit from greater plan size, rather than having their workers take away assets when they retire.

Many Baby Boomers have saved in their company’s defined contribution plan and accumulated significant assets, so if they leave the plan at retirement, “that’s a lot of assets coming out of the plan if we don’t give them solutions to let them stay in the plan,” Bobilya-Feher says.  

The recordkeeper for Aunt Millie’s, John Hancock Retirement, and Brea Dantin, the plan’s adviser at ProCourse Fiduciary Advisors LLC, suggested changes to retain retiree assets in-plan, both Dantin and Bobilya-Feher note. John Hancock data analytics allowed the adviser and recordkeeper to look at the participant demographics at Aunt Millie’s for topics the employer will want to address, Dantin adds.  

A demographics analysis is “sometimes … very eye-opening for employers to go, ‘Oh my goodness, 10% of our population could potentially retire in the next two years. Are we ready for that?’” Dantin says. “Working with the communication team at John Hancock … we really zeroed in on the fact that they’ve got a large pre-retiree population, so we started talking about that a couple of years ago, and then COVID hit,” gumming up their plans.

Employers also want to keep the assets to negotiate favorable pricing for investments, recordkeeping and administrative services. But plan sponsors must balance the focus on costs against greater fiduciary responsibility if more individuals are contributing to the Employee Retirement Income Security Act-governed plan, says Dantin.

Dantin and Bobilya-Feher have discussed and will continue to explore balancing a possible increase of fiduciary liability by expanding plan benefits to retirement participants versus “caring-for-the-employees-like-family conversation,” at Aunt Millie’s, she adds.

Prior to the onset of the pandemic, exploring lifetime income options that would enable retirees to create a regular monthly stream of income about retaining retirees’ assets in-plan, Bobilya-Feher says.

Although Aunt Millie’s has not implemented a change to retain retiree assets, it is being actively considered for the future, as are other changes including the name of the DC plan, Dantin advises. 

“[The] Aunt Millie’s retirement plan, it’s called the savings plan, and one of the things that we’re really pushing is to change [the name] to savings and income so that folks know, if this is the direction the committee decides to go, that they can stay in and create an income,” she adds.

How do plan sponsors benefit?
Plan sponsors benefit from employees staying through fees for recordkeeping, investments and administrative services, says Bill Ryan, a partner in NEPC and its head of defined contribution solutions.   

One plan Ryan worked with had more than $25 billion in participant assets and 400,000 participants, yet more than 40% of the plan was inactive and/or terminated participants. The size allowed “everyone else” to benefit, he says.

Employers with a greater focus on the decumulation phase and in-plan lifetime income options can benefit by limiting  “unintended effects” to their workforce, says Sean Brennan, executive vice president of pension group annuities and flow reinsurance at Athene.  

“We’ve seen in the past that people might extend [their working life]—if they come to retire in a very bad market—longer and delay retirement relative to what they planned, so that’s obviously an impact on the individual, but also it affects the workforce,” he says. “If people aren’t leaving and you have very little control over their leaving … by way of retirement benefits, you can have the outcome of higher frictional costs of employment and people hanging around longer than then you might otherwise want.”

Time, resources and dollars?
The costs of implementing a change are another important decisionmaking factor, from a fiduciary protection prospective, for employers, says Dantin.

Arranging an installment payout system or administration to send out checks to retirees would be easy for plan sponsors—should an employer want to permit installment payouts from participants’ assets—yet an arrangement with greater complexity would be more costly.

“To do things like installment and other distributions, that’s already built by the provider we work with,” says Dantin. “John Hancock can handle all that; they can make it administratively easy, so I don’t feel like that’s a … hurdle, [and] we’re well-prepared in that area.”

Setting up a more significant system would likely be more costly, says Teresa Hassara, senior vice president of workplace savings and retirement solutions at Principal Financial Group.

“To set up a whole separate set of capabilities would not be an insignificant spend,” she says, nothing that because these kinds of systems are still new, it is early for an estimate of what the change might cost.

This view is shared by Jessica Sclafani, a senior defined contribution strategist at T. Rowe Price.

“Every plan’s retirement income journey will look different, so it would be impossible to find a fixed cost,” she says.

Brennan, at Athene, says the increased costs associated would merely be “incremental.”

Employers may drive greater cost savings with the change to retain retiree assets, notes Ryan at NEPC.

“It’s actually more efficient and less time-intensive to keep participants in-plan,” Ryan explains. “It would be a lot of effort for an HR [staff] and benefit managers to track a person leaving the plan and then issue or create a mechanism to kick them out. Once the balance is over $5,000, they can’t just issue a check; they [have] got to send it somewhere for an IRA or do something of that nature, and it’s more difficult to actually track participants down on an annual basis to get them out of the plan.”

Employers that want to meet their fiduciary responsibilities and allow participants to keep assets in-plan should, like “for everything they do … make sure they follow a process and document it,” Dantin says.

By Noah Zuss
June 1, 2023


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