Every single area of the firm—and pretty much the entire financial services industry—was hyperventilating about this opportunity, fortified by a steady diet of news items about the 10,000 Baby Boomers retiring each day.
The Evolving Retirement Landscape
We created exhaustive educational programs and sophisticated interactive tools to help pre-retirees and their advisors gear up for the daunting task of creating lifetime income plans, and developed investments designed to assist in the effort. But by 2008, our collective attention was diverted by the global financial crisis, and most of the industry’s products and services created up to that point were folded.
Thirteen years later, the topic of retirement income is trending again, and this time feels like it's got legs. Some 63% of 401(k) plan assets are owned by participants in their 50s and 60s,1 which is causing plan sponsors to re-think their reluctance to encourage retirees to remain in their plans, as they consider the impact of the potential exodus of more than half of their plan’s assets on plan fees. This, in turn, is pressuring recordkeepers to enhance their systems to allow for more flexible payout options. Having long served as retirement asset accumulation vehicles, 401(k) plans may need to evolve to be more accommodating for those transitioning into retirement.
Given this backdrop, how should consultants to 401(k) plans respond to the potential movement of accumulated plan assets from 401(k) plans?
Set Your Plan Up for Flexibility
The place to start is a discussion with plan sponsor clients about their attitudes toward participants remaining in the plan post-retirement. Paternalistic plan sponsors, perhaps protective and concerned about the future well-being of their employees, may encourage them to stay in the plan and avail themselves of the institutional pricing and fiduciary investment oversight. Others will be concerned about the potential liability and complexity associated with having participants with balances who are no longer employees. In either case, the plan sponsor should be aware of how the plan’s recordkeeping and administration fees might change if many large-balance retirees opt to take a distribution at retirement.
Next, consider the capabilities and functionality of the plan’s recordkeeper. How often may a participant take withdrawals from the plan? Are there fees associated with these distributions? Can the participant direct the funds from which the distributions are made? Some recordkeepers began to address distribution flexibility when the Department of Labor signaled their concerns about plan distributions within the now-vacated Fiduciary Advice Rule, and I would expect more progress to come. You’ll also need to ensure that plan documents reflect the plan’s objectives for the types of distributions that are permitted.
Focus on Income Generation Potential
Review the plan’s investment lineup with an eye toward income generation. Does the menu provide a sufficient mix of options needed for retirees to seek to generate income? Plans tend to focus on investments that are designed to facilitate growth and accumulation. I believe that now is the time to consider volatility-dampening and income-generating strategies, and managed accounts that include personalized 401(k) plan drawdown strategies.
Finally, think outside the plan. Can you offer targeted education on topics directed at pre-retirees, such as optimal Social Security claiming strategies, or maximizing the potential benefits of a managed account by providing additional personal financial data?
The 401(k) plan was conceived as a retirement plan supplement and has matured to be the primary source of retirement savings for many workers. This time around is the right time for retirement plan consultants to help clients tailor their plans to address their retirement income preferences.
- ^Employee Benefit Research Institute and Investment Company Institute, as of 12/31/15.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.
Discussion of distribution flexibility, income generation, managed accounts drawdown strategies and optimal social security claiming strategies are not intended to represent investment advice that is appropriate for all investors. Each investor’s decision must be based on the individual's financial resources, investment goals, risk tolerance, investing time frame, tax situation and other relevant factors.
OppenheimerFunds does not recommend any specific strategies. A financial advisor can suggest strategies designed to meet your financial goals, time horizon and risk tolerance
These views represent the opinions of OppenheimerFunds Head of Retirement and Third Party Distribution and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.