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.
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 increase by more than 40% in the next 20 years, with less projected growth in the 20-64 working age group.
As older participants who have accumulated more assets over time retire and withdraw their accounts, younger workers who have saved less will have to bear more of the plan 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 may 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.
The following action steps can support defined contribution plan participants in retirement:
What retirement tiers might look like in a plan
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.
“As employers think about how to usher employees into retirement,” says Toni Brown, CFA and head of retirement strategy at Capital Group, “they would be well served by looking at retirement not as a finish line but as a transition zone.”
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
Use of this website is intended for U.S. residents only.
American Funds Distributors, Inc., member FINRA.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.