Distribution Flexibility Helps Retirees Preserve Assets, per Vanguard

With more than 4 million Americans turning 65 this year, the U.S. is undergoing its “largest transition to retirement in recent history,” says Jeff Clark, Vanguard’s head of retirement research.

On Wednesday, Vanguard released the inaugural edition of “How America Retires,” a report analyzing the data the firm has about retirement plans for which it is the recordkeeper and industry trends pertaining to retirees.

“We’ve long known about the power of plan design on the accumulation phase of retirement, but we’re now observing the impact that plan designs have on the decumulation phase as well,” Clark says, adding that the findings of the report “underscore the importance of thoughtful 401(k) plan designs.”

Importance of Flexibility

According to the study, retirees in plans that offer flexible distribution options were 35% more likely to remain in-plan three years after retirement. They were also between 15% and 25% less likely to cash out their balances in the first year, compared with those who did not have similar flexibility.

The average balance for those remaining in flexible plans three years after retirement was $331,025, and the median was $120,795. The median for those remaining in a plan without flexibility was close to one-half of that, at $73,415.

“It’s challenging to envision an automatic retirement income solution that would really serve a broad and diverse retiree population, especially given the individuality and personalization of every individual’s own retirement needs,” Clark says. “That’s why … optionality is incredibly important.”

While the study found that 14% of those who retired in 2021 cashed out their retirement plan, their assets only represented 2% of the total assets of all 2021 retirees. Ninety-eight percent of assets were either preserved in-plan, rolled over or distributed as both a rollover and a cash-out.

What’s more, although 94% of 2021 retirees who cashed out their retirement plan had a balance of less than $100,000, between 50% and 60% of those who remained in the plan or rolled over their assets had balances greater than $100,000.

Withdrawal Behavior

Regular planned installment withdrawals and ad hoc partial withdrawals are becoming increasingly popular, as well, according to Vanguard. In 2024, 68% of plan sponsors allowed participants to establish installment payments, and 43%. Forty-three percent of plans permitted terminated participants to take partial ad hoc distributions, up from 16% who did so in 2015. When a plan offers an ad hoc distribution feature, a plan can be used directly as a flexible source of income and withdrawals. 

In examining a sample of retirees and their assets in the period from 2014 through 2018, Vanguard found half of retirees took withdrawals, including required minimum distributions, which begin at age 73. More than one-quarter (27%) of retirees did not touch their savings over the period, and the remaining 23% cashed out after leaving their employer.

Among those who withdrew, the amounts they took fluctuated considerably. Of those who withdrew within five years of retirement, 19% withdrew only in one year, and 34% took a withdrawal each year. Yet among the group that consistently withdrew, only 20% took withdrawals between 3% and 10% annually.

Those that withdrew and those that left their assets untouched had similar financial profiles, investment horizons, incomes and equity allocations, Vanguard found. The key difference was that those who did not touch their assets tended to be two years younger—suggesting they may not have been ready to withdraw or may not have known how to begin doing so.

Plan Sponsor Opportunities

Many variables affect a participant’s decumulation situation, but plan sponsors can do plenty to help.

Vanguard’s annual “How America Saves,” the predecessor and companion report to “How America Retires,” found 45% of Vanguard defined contribution plans offered advice to participants in 2024. But participants 55 and older, in particular, may be most in need.

Half of participants older than 65 self-direct their retirement investments—yet they also tend to have the highest balances, at an average of $420,000. Meanwhile, about 30% had an “extreme equity allocation” in 2024, indicating a possible need for more guidance.

“There isn’t a one-size-fits-all approach for plan sponsors,” the report stated. “What’s important is working to ensure that all retirees understand their next steps—from in-plan solutions, features, and services to additional out-of-plan options.”