Who Is Influencing Retiree Distribution Decisions?

Companies seeking to capture defined contribution (DC) retirement plan rollovers need to understand who is influencing retirees’ decisions.

Previous LIMRA Secure Retirement Institute research has demonstrated that the rollover decisions people make are closely linked to whoever provides them with advice and guidance. For example, 53% of people ages 55 to 70 who had the opportunity to roll over a DC plan balance (of at least $10,000) during the 2009–2012 period, and whose decisions were influenced the most by a financial planner/adviser, chose to roll or transfer their balance to a company other than the plan provider. However, 55% of those whose greatest influence was a call center representative at the plan provider chose to keep their money with the provider, either by leaving the money in the plan or by rolling it into an individual retirement account (IRA) administered by the provider.

But, retirement plans sponsors can influence retirees’ decisions too, so LIMRA looked into DC plan sponsors’ interactions with retiring participants. All but 16% of plan sponsors polled for the LIMRA Secure Retirement Institute “DC Plan Sponsor Perspectives Study” indicated someone meets with retiring employees to discuss their distribution options—whether it’s someone from the plan sponsor firm, such as a human resources manager (49%); a representative from their plan provider (40%); or the plan adviser (15%).

However, only three in 10 plan sponsors that meet with retirees (or arrange for such meetings with plan provider representatives or plan advisers) recommend a particular course of action. Plan sponsors cited a variety of reasons they do not recommend any specific action to retirees. One of the most common concerns is fiduciary responsibility (38%)—they do not want to go beyond what is required by making a recommendation that could be sub-optimal for the participant, thereby risking legal or other negative consequences. Some are even instructed by their plan advisers (18%) or providers/recordkeepers (11%) not to make a recommendation, most likely to avoid fiduciary problems, LIMRA says.

Nearly half (46%) do not want to adopt a one-size-fits-all approach, recognizing that financial circumstances vary widely across individual retirees. More than one-third (37%) of plan sponsors do not provide distribution option recommendations because plan provider/recordkeeper representatives do so. Twenty-one percent indicated they do not make recommendations because retirees have not asked for them.

According to LIMRA, to the extent that such services are in demand and can be supplied efficiently by plan providers and advisers, there may be more “outsourcing” of distribution advice in the future. This represents an opportunity for valuable interactions with retirees early in the decision-making process.

Among plan sponsors that do provide retiring employees with specific distribution recommendations, only about one-third (31%) suggest rollovers, with the majority recommending installment payments (30%) or annuity payments (26%). Seven percent of plan sponsors recommend retiring employees leave all their money in the plan.

The survey found DC plan sponsors generally recommend and prefer distribution options that keep at least some of the money in the plan (e.g., installment payments), though they will recommend whatever option they deem appropriate for retirees regardless of their own preferences.

Among those sponsors that prefer retirees keep their money in the plan, most add the caveat that balances are at least $5,000 or more; plan sponsors are thus generally not in favor of balances below the involuntary cash-out maximum staying in their defined contribution (DC) plans. Such small balances usually add to the cost of running a plan without appreciably boosting the size of the plan.

LIMRA notes that since the focus of discussions with retiring employees naturally centers on distribution and deployment, it poses a challenge for providers’ stay-in-plan retention strategies. But, this situation may change if regulations make conducting rollovers more burdensome or if required disclosures include more emphasis on the benefits of remaining in the plan, LIMRA says.

LIMRA concludes that if plan sponsors have no clear preference for what retiring employees do with their plan balances, this may present plan providers and advisers with more options for retaining assets, either within the plan or within rollover IRA products.