Assets in or out is the question for plan execs

Defined contribution executives are wrestling with a 401(k) plan strategy whose theme is best described by the band The Clash: “Should I Stay or Should I Go?”

Executives' attitudes always have varied about encouraging participants to keep their money in the plans when they retire or leave the company, but these attitudes will be buffeted by the Department of Labor's fiduciary rule impact on advisers and IRA rollover specialists.

“There is a generalized expectation that greater assets will stay in plans” due to enactment of the fiduciary rule, which requires more responsibilities for advisers, some of whom may be discouraged from pursuing rollovers, said Jessica Sclafani, associate director retirement at Cerulli Associates Inc., a Boston-based financial research firm.

The rule takes effect in April. Even with a new president — Donald J. Trump will take the oath of office in January — and a new labor secretary, “we expect the conflict of interest rule will move forward as planned,” Ms. Sclafani said.

The corporate DC approach to stay vs. go has been pegged to a corporate philosophy regardless of outside events. Some plans want retirees to keep their money in the plans, noting that having more assets gives the plans greater bargaining power and the opportunity for lower fees. Others are happy to see retirees leave, especially if they have small balances, to reduce administrative costs.

Ms. Sclafani, other researchers and DC plan consultants say larger plans are more likely to encourage participants to keep their money in the 401(k) plans instead of rolling over those accounts into an IRA.

In a survey of DC record keepers conducted during the first half of 2016, Cerulli and The Spark Institute found that 73% believe more assets will stay in corporate DC plans due to the fiduciary rule, also known as the conflict of interest rule.

“The basis for this assumption is that the increased scrutiny and additional work that will be required of a financial adviser” in the rollover process “will act as a serious impediment to future rollover flows,” Ms. Sclafani said. The survey covered 25 record keepers with nearly $4 trillion in assets under management.

In a separate Cerulli survey of managers specializing in defined contribution investment only, 59% said they believed assets will stay in DC plans vs. rollovers thanks to the fiduciary rule. The results are based on comments from 29 asset managers responsible for $1.7 trillion in DC assets who were interviewed in the second quarter of 2016.

The prospect of more assets being held in DC plans comes at a time when outflows from corporate plans are greater than inflows. “This will be a widening trend for the rest of the decade,” said Ms. Sclafani.

According to Cerulli research to be published next month, outflows exceeded inflows by $40 billion last year. Corporate DC assets totaled $4.9 trillion last year. The results were based on analysis of Form 5500 filings.

Outflows started exceeding inflows in 2013 and continued in 2014, said Ms. Sclafani, declining to provide additional details.

DC plan executives aren't sure about the impact of the fiduciary rule on asset retention strategies, said Lori Lucas, the Chicago-based executive vice president and defined contribution practice leader for Callan Associates Inc. They want more guidance from the Labor Department as to what distinguishes education from advice, she said.

“Clearly, with the fiduciary rule, there's been discussion among sponsors about their role,” she said “There is concern that if they take an active role, it could be construed as advice.”

As for taking action, a Callan survey published in January found that 14.6% of sponsors said they would “actively seek to retain” assets of employees who retired or left the company in 2016. In 2015, 13.8% did, and 18.8% did in 2014.

Many sponsors, Ms. Lucas added, still lack a policy about assets of retirees or those who left the company. The Callan survey showed “no distinct trend” on such policies. For example, 43.5% had such a policy last year vs. 59.1% in 2014 and 49.4% in 2013.

Among plans with a policy, 24.1% sought to retain retiree assets and 22.2% wanted to retain assets of people who left the company, while 15.7% did not seek to retain retiree assets and 14.8% didn't want to hold ex-employee assets. Another 2.8% had other policies.

“Many of the plans seeking to retain assets offer an institutional structure that is more cost effective than what is available in the retail market,” said a Callan report on the survey results.

But Jean Young, senior research analyst at Vanguard Group Inc.'s center for retirement research, said some participants in some smaller plans may be better off rolling over their accounts into an IRA. “It all depends on the fee structure,” said Ms. Young, referring to in-plan administrative fees. “It's not a slam dunk to stay in the plan.”

Larger plans, she added, offer the best stay-in-plan opportunities because they usually have institutionally priced share classes.

The percentage of participants keeping assets in plans upon retirement or departure has remained consistent over time, according to Vanguard's analysis of its record-keeping business. Fifty-one percent who retired or left an employer last year kept the money in their respective plans. The percentages from 2010 through 2014 remained between 48% and 49%.

A similar consistency for keeping assets in plans is found when Vanguard tracked choices of retired and former employees in a given year — 56% last year and between 53% and 55% from 2010 through 2014.

In another research report, Vanguard noted that most retirement-age DC participants take the money out of their employer's plan within five years after retiring or leaving, usually through an IRA rollover.

“When plans permit flexible distributions, retirement-age participants are more likely to remain in the employer plan,” said the Vanguard research report based on client record-keeping data from 2005 through 2015.

Sponsors' favoring retention of retirees' assets can conduct general education campaigns that include illustrating a 401(k) plan's advantage of having lower cost institutional shares as well as investments that have been vetted by plan executives. They also can point out that certain plan investment options, such as stable value, aren't available in an IRA. And they can encourage participants to “roll in” assets from previous employers' plans.

However, sponsors remain uncertain about stay vs. go, according to the soon-to-be published Cerulli research based on 401(k) plan executive comments. When asked their preference on plan assets of retired or separated employees, 50.4% said they should be rolled over to an IRA, 26.8% advocated rolling the assets into another employer's plan if possible and 10% recommended a full cash distribution. Just over one-third — 36.7% — said they wanted the assets to remain in their plans, while 23.3% had no opinion. The results were based on a fourth-quarter survey of 801 401(k) plan executives.

Robyn Credico, defined contribution practice leader for Willis Towers Watson PLC, said most of her clients allow retirees or terminated employees to keep their accounts in the company's 401(k) plan, but some are required to leave the plan by age 70 or even age 65.

“It's more likely for large plans that more people will stay in the plan” after retirement, said Ms. Credico, who is based in Arlington, Va. She added that many companies are still concerned about what they can tell participants based on the fiduciary rule.