Capital Ideas

Investment insights from Capital Group

Retirement Income
Why retirement plans should keep working after retirement
  • The coming wave of retirees will reduce retirement plan assets.
  • Employers can save money by keeping retirees in their plans.
  • Keeping retirees "in the family" provides a tangible employee benefit.

Everyone seems to want to help workers save for retirement. Employers encourage participants to use automatic payroll deductions to save as much as they can. Investment managers and the financial media stress the importance of retirement planning.The government has created a whole set of tools – from auto-enrollment to default investments – to increase the nation’s retirement plan savings.

Far less attention is paid to what happens when people actually retire. How do they draw out their funds? What investment changes should they make?

Today, retirees are often on their own to answer these questions – but that could be changing. Both employers and employees are starting to see the value of keeping participants in the plan after they retire.

70 is the new 60. 

One factor in this change of thinking is the aging of the workforce. The U.S. Census Bureau expects the number of people over age 65 to more than double in the next 20 years, with much less projected growth in the 20-64 working age group.

As older participants who have accumulated more assets over time retire and roll their accounts over, younger workers who have saved less will have to bear more of the plan costs.

Chart showing baby boomers retiring may lead to 401(k) assets shrinking

Keeping retirees in the plan builds goodwill and helps reduce employer costs.

The relatively simple step of encouraging participants to stay in the plan after retirement can be a cost-effective way for plan sponsors to address this challenge.

With high-balance accounts remaining in the plan, the costs of running and maintaining it stay low. In addition, participants start to view the retirement plan – and their employer – as something they hold on to after they’ve accumulated retirement savings. Thus, they may be more likely to make responsible decisions about when to retire.

5 ways staying in a plan can help retirees better manage their retirement savings

  1. Reinforces good investing behaviors. Participants enjoy the continuity of the plan instead of a whole new set of investment – and spending – decisions at retirement.
  2. Allows the consolidation of retirement plan assets. Participants may be able to “roll-in” savings scattered across former employer plans.
  3. Provides investment oversight. Retirees continue to access professionally selected and monitored retirement investments.
  4. Offers age-appropriate investment options. The plan may offer access to age-specific solutions such as target date funds.
  5. May result in lower costs. Retirees may benefit from institutionally priced investments.

What can sponsors do to retain retirees?

The following action steps can support defined contribution plan participants in retirement:

  • Work with the recordkeeper. Most plans can facilitate lump-sum and systematic withdrawals, but not all recordkeepers support ad hoc participant distributions.
  • Update employee communications and education materials. A little outreach can help pre-retirees understand the advantages of staying in the plan.
  • Evaluate core menu and target date options. Investments with more predictable returns can help participants as they move from saving to spending.
  • Consider creating a retirement tier. Plan sponsors may wish to create an additional set of menu choices in their defined contribution plan lineup to address the unique spending requirements of retirees, including options geared toward different rates of withdrawal.

What a retirement tier might look like

Planning ahead to a post-retirement age

Keeping retirees “in the family” by keeping them in the retirement plan is a great way for employers to prepare for large demographic shifts that are happening in the workplace. Instead of watching the most skilled and knowledgeable employees leave the workforce at age 65, employers can have the flexibility to accommodate a phased transition into retirement, extend full- or part-time work past retirement age, or simply allow workers to retire on their own schedule.

“As employers think about how to usher employees into retirement,” says Toni Brown, CFA, Capital Group’s senior defined contribution strategist, “they would be well served by looking at retirement not as a finish line but as a transition zone.”

The defined contribution plan was originally designed as a supplemental retirement vehicle – workers’ primary retirement arrangements were defined benefit plans that took care of them through retirement. Now that defined contribution has become established as the predominant retirement plan for American workers, it should transition to a complete retirement system that serves retirees as well as workers.

For more on this topic, read our white paper, An Effective Retirement Plan Does Not End at Retirement.

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