Auto enrollment. Auto escalation. The two have worked hand in glove as 401(k) plan sponsors tried to entice participants to save for retirement.
While the twin auto features are mainstays in 401(k) plans, the popular duo soon might be sharing the spotlight with a new rising star: the automatic drawdown.
As the earliest users of 401(k) plans get ready to retire, employers increasingly are focusing on how to help them manage the task of spending down their savings. Many are providing their retiring employees with 401(k) drawdown options that will allow them to receive regular payments or "paychecks" throughout retirement.
Today, nearly 3 in 5 plan sponsors (57%) offer employees the opportunity to draw down their funds in installments, up from 37% in 2013, according to a report released in January by Alight Solutions. Of the 43% not offering automatic payments, 32% said they are very or moderately likely to offer the capability in 2019.
Many companies are stepping forward knowing that employees need flexible distribution options regardless of whether the industry receives safe-harbor guidance on in-plan annuities. Participants who do not need or want annuities still will need mechanisms to withdraw their funds other than in a lump sum or rollover to an individual retirement account, plan sponsors said.
Mortgage Guaranty Insurance Corp., a publicly traded mortgage insurance company, added installment payments as a distribution option to its $280 million 401(k) plan in 2015. Retirees can choose to receive payments either monthly or quarterly, according to Brenda Grabowski, total rewards manager in MGIC's human resources department in Milwaukee.
In addition, in 2017 the company gave participants the ability to selectively decide from which investment funds the drawdowns should come and in which order, an arrangement that industry experts describe as cutting edge.
Ms. Grabowski said 16 retirees are taking advantage of MGIC's installment and fund-specific withdrawal options. She did not have information readily available as to the total number of retirees eligible for the services.
MGIC decided to give employees drawdown mechanisms because it wanted to encourage them to leave their assets in the plan rather than roll them over to an IRA, where drawdown options are available, Ms. Grabowski said. The decision to "rollover or stayover" — the theme of MGIC's education campaign — leaves employees in "a vulnerable place if they don't have all of the information," Ms. Grabowski said, referring to the lower cost of funds in 401(k)s vs. those in IRAs.