Sponsors change focus to holding on to assets

After decades encouraging participants to build up their retirement savings, plan sponsors have shifted their attention to helping them draw down their money sensibly throughout their retirement.

That was one of the key themes that emerged during Pensions & Investments' West Coast Defined Contribution conference held Nov. 3-5 in San Diego.

The majority of plan sponsors today offer retiring participants flexible distribution mechanisms that allow them to withdraw funds systematically over time rather than having to take their retirement savings in one lump sum, said Ross Bremen, a Boston-based partner at NEPC LLC, during a panel discussion on plan fees.

The Federal Thrift Savings Plan, the $599.5 billion 401(k) plan for federal employees, for example, loosened its withdrawal options for retirees in September, a move that cut the number of retirees taking full distributions by half, according to Jim Courtney, the Washington-based director of communications and education for the Federal Retirement Thrift Investment Board, which administers the plan.

"For years participants have been telling us they would love to stay in the plan if we could just loosen up very tight withdrawal rules," Mr. Courtney said.

Participants are now able to start and stop their scheduled payments, change the payment arrangements at any time and can even make ad hoc withdrawals on an as-needed basis, he said.

Many other plan sponsors reported thinking about ways to make it more attractive for near retirees to keep their money in the plan after leaving the workforce. Sempra Energy in 2019, for example, implemented partial distributions "so that retirees can take money out as they need any time," said Marvin Tong, the company's Los Angeles-based senior investment analyst of pension and trust investments.

Other plan sponsors at the conference that implemented more flexible withdrawal options for retirees and are looking to encourage them to stay in the plan include Qualcomm Inc., NFL Players Benefits and Unum Group.

The shift comes as plan sponsors seek greater economies of scale to maintain their leverage in negotiating record-keeping and other fees, a potential issue as waves of baby boomers hit retirement and start to draw down their funds, speakers said. Helping retirees transition out of the workplace also helps create "natural turnover," which allows younger workers to advance, said Matthew Gnabasik, a partner at financial services firm Cerity Partners in Chicago.

In addition, it shields them from "the retail world of investments," which he said can be a dangerous place. "If you're a newbie or a novice, you can get fleeced," Mr. Gnabasik said.

The closely related topic of retirement income — namely annuities — also dominated many discussions at the conference. Plan sponsors were generally wary of annuities and reluctant to include them in their plans. Kathy Makowski, the Broomfield, Colo.-based vice president of total rewards at Sisters of Charity of Leavenworth Health System Inc., likened annuities to the "Hotel California," saying that once you're in, "you never come out."

"They're totally cumbersome to administer and somewhat expensive," she said. SCL Health runs three defined contribution plans with a total of $1.5 billion in assets.

Beating the negative perception of annuities won't be easy even if the Setting Every Community Up for Retirement Enhancement, or SECURE Act, is passed, according to conference speakers. The legislation, which provides plan sponsors with safe harbor protection in the selection of annuity providers, might entice some sponsors to consider the products but it wouldn't cause them to "open the floodgates and begin adding them to the plan," said Richard Fulford, executive vice president and head of U.S. defined contribution at Pacific Investment Management Co., Newport Beach, Calif.

While the bill offers a safe harbor, it doesn't address "a host of other issues," such as cost, complexity and transferability, he said.

The chances of the SECURE Act passing anytime soon, however, are not looking good given gridlock in Congress, said Michael Kreps, Washington-based principal at Groom Law Group LLC, during his keynote address on policy and legislative developments.

Mr. Kreps said there's less than a 50% chance that the legislation will pass before year-end. "As talks about shutdowns intensify," it becomes "less and less likely," he said.

Plan sponsors' focus on helping retirees plan for the long run has supported their role in helping participants handle the short-term fear of a recession. During a panel discussion on how participants can "recession-proof" their portfolios, plan sponsors noted that they have long encouraged participants to take a long-term view of their investments.

"Economic cycles come and go," said John R. Higdon, the St. Louis-based manager of retirement plans at BJC HealthCare, a non-profit health services organization with $1.7 in DC assets. The question, he said, is whether a participant's asset mix is aligned with his or her risk tolerance, and if it's not, he or she should rebalance.

It's hard to predict recessions, Mr. Higdon said. "Not to slam economists, but economists do not have a good track record of predicting when a recession is going to hit," he said.

Susan Ramirez, the Santa Clara, Calif.-based senior director of total rewards in the Americas for Hitachi Vantara, echoed similar views. "We want them to keep perspective," she said of participants in the company's $781 million 401(k) plan. "Downturns are normal. Usually following downturns, there's a lot of upside."

As a result of their messaging around staying focused on the long term, participants have not been asking questions about a possible recession or expressing fear, according to plan sponsors. "We haven't heard even a peep that employees are worried about recession," Mr. Higdon said.

Fear around cybersecurity risks, however, loomed large among plan sponsors. In his keynote address, Doug G. Peterson, chief information security officer at Empower Retirement in Greenwood Village, Colo., talked about the cyberrisks facing plan sponsors and their record keepers and what they can do to prevent cybercriminals from gaining access to participants' retirement accounts.

"You're sitting on a massive amount of money," he said, referring to plan sponsors and their record keepers. "In the retirement record-keeping space, there is no FDIC insurance."

Mr. Peterson encouraged plan sponsors to implement training programs to help employees identify legitimate email from phishing email, which he said is the No. 1 white-collar crime investigated by the FBI.

He also urged plan sponsors and record keepers to implement multifactor authentication, a system that requires more than one method of authentication to verify a user's identity for a login or other transaction.

"It's a pain," he said, "but it completely changes the paradigm for what it takes to break into your account."

Mr. Peterson's biggest piece of advice, however, was aimed directly at participants. At a minimum, participants should claim their retirement accounts. They should check their accounts and register them or run the risk of being claimed by an impostor.

Many participants, Mr. Peterson said, have had money taken from their accounts because they never went online to check them, thinking that was the safer way to go.

"If you're dealing with any record keeper today, your account is already on the web. If you don't claim it, it's easier for the criminals to pretend to be you and claim your account," he said.