Build a retirement tier in your DC plan

Takeaways

  • To become a more effective retirement solution, defined contribution (DC) plans must evolve to better serve retirees who remain in the plan.
  • Some employers are encouraging retirees to stay in the plan — recognizing that it can benefit both participants and plan sponsors.
  • Fiduciaries should keep these retirees in mind when considering plan design, investment menu, communication/education and recordkeeping arrangements.
  • Consider creating an “in-retirement tier” in the DC menu — with options specifically managed for a retiree making systematic withdrawals.

Takeaways

  • To become a more effective retirement solution, defined contribution (DC) plans must evolve to better serve retirees who remain in the plan.
  • Some employers are encouraging retirees to stay in the plan — recognizing that it can benefit both participants and plan sponsors.
  • Fiduciaries should keep these retirees in mind when considering plan design, investment menu, communication/education and recordkeeping arrangements.
  • Consider creating an “in-retirement tier” in the DC menu — with options specifically managed for a retiree making systematic withdrawals.

 

Staying in a plan has many benefits.

Both participants and plan sponsors can reap gains.

 

FOR EMPLOYEES

Advantages for employees may include continued employer fiduciary oversight of investment options, access to institutionally priced investments and low-fee recordkeeping.

 

FOR EMPLOYERS

Keeping retirees in a plan boosts plan assets, which can help drive down costs for investments and recordkeeping.



Give retirees distribution options.

Many plans today offer flexible withdrawal options that include lump-sum, ad hoc and systematic withdrawals. This type of flexibility makes the DC plan work for retirees who may use their savings in different ways at different points in their retirement. Key to this success is ensuring the fees to take withdrawals are either zero or nominal. Furthermore, incorporating Minimum Required Distribution calculation services makes the DC plan more effective for retirees.

Recordkeeper attitudes and systems are evolving rapidly to offer flexible distribution strategies. The below tables summarize our findings from a survey of recordkeepers in the marketplace.

Availability of distribution options

Distribution options

Availability

Monthly, quarterly, annual distributions Standard
Pro rata across all sources Standard
Source-specific distributions Limited

Fees for typical distribution services

Standard services

Additional fees*

Systematic Mostly, no
Lump sum Likely
Ad hoc Likely

* Recordkeeping arrangements vary. Examples of additional fees: Plan A: $60 for periodic distribution setup and $15 for each periodic installment. Plan B: $50 for full or partial withdrawals, but no fee on periodic installments.

Source: Capital Group.

Build an in-retirement tier.

Many DC plans today offer a tiered investment menu, generally consisting of Tier 1 with the qualified default investment alternative (typically a target date series) and Tier 2 with asset class options for participants to create their own portfolio. These options, particularly a target date series managed through retirement, may be appropriate options for retirees.

We suggest considering adding a Tier 3, an in-retirement tier, that would include options specifically managed for a retiree making systematic withdrawals. This could include capital markets-based strategies that are liquid, managed for retirees and easy to understand. A plan sponsor could also facilitate access to components of the in-retirement tier that are physically out-of-plan, such as an annuity bidding platform and an advice provider.

* “Through” target date series and some core options could also be appropriate in-retirement options.

An in-retirement tier: Two case studies

A MATERIALS FIRM

A MATERIALS FIRM

  • Proactively encourages participants to remain in the plan after they retire
  • Offers four income-oriented options (not specifically targeted to retirees)
  • Institutional annuity platform available — outside the plan
  • Worked with recordkeeper to create total flexibility on distribution options without additional user fees

 

A MANUFACTURING FIRM

A MANUFACTURING FIRM

  • Neutral on whether retirees stay in the plan
  • Addresses the needs of retirees through investment options, distribution flexibility and communication
  • Income-oriented investment options available

 

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.

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.