Corporate defined contribution plan executives are increasingly looking to keep participants in their plans after they retire as a way to keep costs down for both the retiree and the sponsor.
This “participant for life” strategy, if successful, creates economies of scale: The higher the total plan assets, the lower the administrative costs the plan sponsor pays and the cheaper the fees borne by participants. The retirees also get access to investment options and tools that are often superior to those available outside the plan, experts say.
And while some large DC plans have been trying to retain retiree participants for years, the industry is only recently accelerating its shift away from focusing just on asset accumulation to the distribution phase as 401(k) and other DC plans are now the main retirement vehicle for most workers. New investment options embedded with annuities or income guarantees have only further piqued DC plans executives' interest in holding on to their former workers.
Most 401(k) participants still quit their employer-sponsored plans when they retire. In 2007, $230 billion in assets were taken out of defined contribution plans by retirees, and 80% to 90% of that was rolled over into individual retirement accounts, according to researcher Cerulli Associates.
“The big pot of money here is the rollover business,” said Richard Davies, head of product strategy at AllianceBernstein Defined Contribution Investments, New York. “Every financial adviser is in the rollover business. Fifty percent of mutual fund sales are rollovers. Bundled 401(k) providers encourage participants to roll over. And salesmanship will continue, presenting plan sponsors with a serious challenge.”
Large plan sponsors seem committed to retaining their participants past retirement. A recent survey by money manager consultant Casey, Quirk & Associates LLC, Darien, Conn., found executives at nearly two-thirds of DC plans with $1 billion or more in assets said they are trying to keep and service employee accounts post-retirement.
“Keeping participants in the plan after they retire is definitely beneficial to the plan sponsor,” said Ross Bremen, a partner at Cambridge, Mass.-based investment consultant NEPC LLC. “It helps cover the costs of administering the plan. And for participants, the DC plan is probably the best option they're going to get: institutionally priced funds; no transactions fees; well-selected options.”