More plans looking to hang on to assets of departing workers

Employees may leave their jobs but the money in their retirement plans can stay.

That's the thinking among a growing number of defined contribution plan sponsors, particularly those running large plans, recent studies from Alight Solutions and Callan LLC show.

With baby boomers retiring, plan sponsors would rather not see their assets "walk out the door" as it could compromise their ability to negotiate fees, said Rob Austin, head of research at Alight in Charlotte, N.C.

Sponsors with a high percentage of retired or non-active participants, especially, are reconsidering their views. If they were to lose the assets of retired and former employees, it could mean a "totally different fee arrangement with not only the record keeper but the investment offerings within the plan," said Greg Ungerman, senior vice president and leader of Callan's defined contribution practice in San Francisco.

Many plan sponsors are taking action. In a bid to prevent the assets of their retired and non-active participants from leaving, plan sponsors are adopting retiree-friendly plan features and making it more desirable for separated participants to remain in the plan. Some, for example, are making their fund lineups more attractive to retirees by adding more bond funds, while others are making it easier for more participants to roll in money from IRAs and other qualified retirement plans.

Today, 33% of plan sponsors would like retired and separated partici- pants to keep their balances in the plan, up from 27% in 2014, according to Alight. Only 5% would rather they remove their balances, down from 11% five years ago.

Hilton Worldwide Holdings Inc. is among the sponsors looking to encourage employees to keep their assets in its 401(k) plan after they retire or leave. "It's something we'll be talking about this year," said Mary Nell Billings, senior director of Hilton's global retirement programs in Memphis.

Ms. Billings said the company will discuss a potential employee communications campaign about the benefits of leaving assets in the plan at its oversight committee meeting this quarter. The company, she said, is well positioned to initiate such a campaign given the pro-retiree features of the $1.7 billion 401(k) plan. "We have as flexible a system as you can have," she said, referring to the withdrawal options the plan offers retirees. They can elect to withdraw their funds in several ways, including distributions whenever they need money or regular monthly, quarterly or annual payments, which can be adjusted over time as needed. These options, she said, allow "the plan to flex as you need it to," unlike annuities that "don't always flex with your life as you need it."

The plan also facilitates the roll-in of assets from IRAs and other qualified retirement plans, a benefit for participants looking to consolidate their savings.

The anticipated communications campaign will "hit all the points of why it might be a really good idea for them to do that," she said.

Many companies, like Hilton, have simplified the process of rolling in funds to both build plan assets and better serve participants. Almost half of sponsors (46.3%) encourage roll-ins from qualified plans, with another 17.9% planning to take steps this year to encourage them, according to Callan.

The Ohio Public Employees Deferred Compensation Program, a $14 billion 457(b) plan for some 210,000 Ohio state public employees, has gone the extra mile to facilitate the roll-in process. Unlike most plan sponsors, which allow only active participants to roll in funds from outside sources, Ohio Deferred Compensation gives even retired and non-active participants that ability, something it's allowed since 2001.

The plan sponsor talks to people about rolling in money from other accounts when they first start in the plan, a practice that has helped to grow its asset base, said Keith Overly, the Columbus-based executive director of the plan.

Ohio Deferred Compensation has nearly 15,000 accounts that were rolled into the program, up from 1,200 in 2002, he said. The ability to consolidate and manage retirement accounts in one place is appealing to participants as many have multiple plans, Mr. Overly added.

In addition to talking up the benefits of the plan when participants first enroll, the plan does targeted email communications to pre-retirees reminding them of the retirement planning and other available services. Also, if a participant calls about wanting to roll over the balance to an outside provider, plan representatives make it a point to review the advantages of staying, such as lower fees.

Partially as a result of that, the plan's assets have nearly tripled to $13.8 billion at the end of January from $5.5 billion in December 2004, Mr. Overly said.

The increase, in turn, has led to significant savings. "In the last three years, we've had six opportunities to move to lower-cost share classes with our existing investment managers because of our asset growth," he said. "We estimate that's about $4.6 million in savings annually."

United Technologies Corp., sponsor of a $21.5 billion 401(k) savings plan with more than 100,000 participants, also heavily promotes the benefits of leaving assets in the plan after participants retire or find employment elsewhere. In 2015, it launched an ongoing targeted communication campaign encouraging employees to keep their assets in the plan and "utilize it as a destination to consolidate their retirement savings," said Kevin Hanney, senior director of pension investments at United Technologies in Farmington, Conn.

The communication, which is sent to employees leaving the company, highlights the ability of participants to roll in funds from IRAs and other qualified retirement accounts, even if they are retired or no longer work for the company.

"It's common for employers to allow active employees to consolidate their retirement savings from other plans into their current plan. What is less common is what we do at UTC, which is we allow all participants to consolidate within our plan regardless of their employment status," Mr. Hanney said.

The company also lists among its many perks the ability it gives former employees to continue repaying 401(k) loans, a benefit for participants who otherwise would have to repay such a loan in full within a fixed period. Employees tend to default on loans upon leaving, an event with tax ramifications, said industry analysts. By allowing participants to continue making coupon payments, it helps them avoid the potential for a "nasty tax hit," Mr. Hanney said. It also reduces the frequency of defaults, thereby closing a source of asset leakage from the plan.

Fifty-five percent of plan sponsors in 2018 moved to allow former participants to continue loan repayments, according to Alight. Of those that did not, 33% are moderately or very likely to allow such repayments in 2019.

Other sponsors are making their lineups more attractive to retired and ex-employees. Some 2.4% sponsors have done so, with an additional 10.7% planning to improve lineups this year, according to Callan.

Many plans only offer a capital preservation fund and one other bond fund — the rest are equity funds, according to Callan's Mr. Ungerman. "That's not a lot of choice for an 80-year-old who doesn't need equity risk," he said.

Of course, not all plan sponsors look to retain assets. Among smaller sponsors, those with less than $250 million in assets, the interest in retaining assets subsides, according to a recent Cerulli Associates' study. Cerulli found that 21% of sponsors with less than $25 million and 30% of midsized plans with $25 million to $250 million want to keep the assets of retired and former participants in the plan. That compares with 33% of large plan sponsors — those with more than $250 million — that do, according to Cerulli.

"Plans sponsors have differing opinions on what they want to do with the assets of employees who either separate from employment or retire," said Dan Cook, research analyst in Cerulli's retirement practice in Boston. Some, he said, are paternalistic, while others are more hands-off.

One reason for wanting participants out might be tied to the cost of keeping them, analysts said.

Some plan sponsors look at it on the flip side and ask themselves, "'Do we really want to be paying $90 a head to baby-sit their retirement assets?'" said Michael Francis, president of Francis Investment Counsel LLC in Brookfield, Wis.

"Not all employers view it the same way," Mr. Hanney added, explaining that the cost for some "might be more than it's worth."

For United Technologies and other large sponsors at least, the cost-benefit analysis falls squarely on the side of retaining assets.

"The benefits to us as an employer outweigh the additional costs that we incur to have people in the plan," Mr. Hanney said.