Benefits and Compensation

‘Through’ Fund Strategy May Serve Near-retirees Best, Vanguard Says

While most U.S. retirement plan participants age 60 or older move their assets out of employer plans within five years of leaving a company, they often don’t touch the funds for years after that, a new report by money manager Vanguard found.

As a result, Vanguard suggests to plan sponsors, this tendency of older terminated employees not to immediately draw down retirement assets supports sponsors opting for “through” glide paths in their plans’ target-date funds’ design. Rather than a conservative “to” approach, which takes participants’ assets just to the point of retirement and assumes early drawdown beginning shortly after a career ends, “through” design fosters an investment strategy at retirement that recognizes assets are going to be preserved for several years after working ends.

In a December 2013 Vanguard research paper titled “Retirement Distribution Decisions Among DC Participants,” the authors looked at how these distribution decisions by terminated workers age 60 and older affect TDF design and sponsor choices about offering in-plan retirement income programs.

Despite historic market uncertainty in recent years, the overwhelming majority of retirement-age defined contribution plan participants still move their assets out of their employer’s plan not long after leaving the company and usually opt for an individual retirement account rollover.

DC Plan Distribution Options for Older Participants

Vanguard reminds that employer-sponsored DC plan distribution options for those 60 and older usually allow participants to choose from:

  • remaining in their employer’s plan without initiating installment payments;
  • remaining in their employer’s plan and taking installment payments;
  • rolling over their assets into an IRA;
  • taking their account balances in cash; or
  • pursuing a combination of these strategies.

Continuing data collection that the money manager and retirement plan service provider started in 2004, the Vanguard researchers noted a “remarkable” lack of change in the cashout rate for older participants who ended employment in 2008 and 2009, years marked by a global financial crisis and plunge in stock prices. During that period, despite the market upheaval, the behavior of retirement-age participants was similar to that of both earlier- and later-year cohorts, it explained.

Only about one-fifth of retirement-age participants and 20 percent of their assets remain in an employer plan five calendar years after the year of job termination, the Vanguard report said. Yet after their retirement savings were moved to an IRA, most chose not to begin distributions until the required minimum distribution age of 70, according to independent survey data Vanguard used.  (See ¶265 in The 401(k) Handbook for more information on RMD rules.)

Vanguard said that 90 percent of DC plans it administers require terminated participants to take a distribution of their entire account balance if they want ad hoc partial distribution from it over time. The few that do allow partial distributions to terminated participants tend to be larger plans, though, so that option is available to roughly a quarter of retirement-age participants, the firm said. The prevalent choice of shifting the account to an IRA “seems somewhat linked to plan rules that inhibit ad hoc or flexible withdrawals from DC plans,” the report concluded.

To read the complete story on Thompson’s HR Compliance Expert, click here.

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