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Defined Contribution

Alight: Departing employees who stay in DC plan for at least a year not likely to leave

If defined contribution plans encourage departing employees to keep their balances in their plans for at least a year, there's a good chance participants will retain their accounts in the plan. That's the conclusion of a study by Alight Solutions, which tracked participants in plans for which Alight is the record keeper from 2008 through 2017 and analyzed participants' behavior after they decide to retire or take another job.

"When people take action to take a withdrawal they'll do it relatively soon," said Robert Austin, director of research, said in an interview.

Alight's research found "remarkable consistency" in participants' behavior in each year from 2008 through 2017, Mr. Austin said.

The percentage of participants taking a distribution — either a cashout or a rollover — within the first year of leaving their employer ranged from 55% to 60%. "If people don't act quickly (to withdraw their accounts) after termination, they'll probably stay in the plan," he said.

Alight also found that for each year, excluding 2017, the percentage of people taking a distribution from their plans between one year and two years after leaving employment ranged from 14% to 16%, according to a report about the study.

Alight doesn't take a position on whether clients should encourage departing and former employees to keep their retirement assets in their plan, Mr. Austin said. He noted that plan managers wishing to encourage asset retention provide education about the difference between in-plan fees and rollover IRA fees as well as about in-plan investment options, such as stable value, that aren't available to retail investors.

Alight also found that retirees are more likely to keep their money in plans if the plans allow installment distributions. The report said 39% kept their retirement assets in plans that allowed installment distributions vs. 27% who kept their retirement assets in plans that never offered the installment option. This distribution analysis tracked participants 60 years and older who left their employers from 2008 through 2017.

"This finding makes intuitive sense," the report said. "People who have accumulated a large balance over their career with their employer's DC plan may well have developed a high level of comfort and trust in that relationship."

Installment distributions are gaining popularity, Mr. Austin said. A previous Alight survey of DC plans — both clients and non-clients — found that 66% allowed automatic installment distributions in 2017 vs. 51% in 2007.

The latest study covered 2.88 million participants who left their employers from 2008 through 2017. Their total balances based on the year prior to departure was $131.4 billion.

Mr. Austin said Alight's experience might differ from its record-keeping peers because Alight doesn't have a rollover IRA business. In 2017, rollovers to IRAs represented 10% of balances for participants who left their employers.

"This is much lower than the 25% figure quoted across the industry," said the report, which referenced a 2018 report by Cerulli Associates regarding DC plan assets rolled over into IRAs.