Goodbye rollovers, hello “stay-overs”

Moen-AlexNo surprise here—Baby Boomers are retiring. But as they retire, there is a new trend in town, the “stay-over.” The stay-over approach represents a shift in thinking about how employees will handle their retirement savings investments. Instead of rolling money out of employer plans into IRAs, the stay-over approach encourages retirees to keep their money in their current company-sponsored plans.

Plan sponsors, and their plan advisors, are now competing to keep retirees’ money in employer plans. The reason? As that extremely large workforce exits, sponsors are worried about their ability to negotiate fees with their outside fund managers and maintain lower overall fees for plan participants. Plan sponsors are now forced to weigh traditional concerns related to administration and compliance costs against fee negotiations. A recent Wall Street Journal article says, “Workers pay about 0.45% of assets in fees to outside money managers when they remain in the firm’s 401(k) plan; by comparison, experts estimate they would pay fees of more than 1.5% in IRAs.” Increased plan assets create economies of scale, which in turn reduces the level of fees for all participants in the plan. This movement is also in line with the overarching goal of encouraging retirees’ savings, focusing on keeping money in the plan, and educating employees about their options. Baby Boomer assets in defined contribution/401(k) plans currently total $4 trillion dollars, according to the same Wall Street Journal article, and 2013 was the first year that plan level withdrawals exceeded contributions. This rollover versus stay-over debate is just beginning to launch.

Employees benefit by keeping their balances in the plan as well. Fees paid by participants have a huge impact on the growth of investments over time, thus participants can benefit from the lower fees. Retirees face pressure from outside financial advisors who will try to convince them that keeping money in employer plans adds a layer of difficulty to investment changes and accessing funds. On the contrary, though, investing can be easier for ex-employees to manage because they are more familiar with the fund offerings and fewer choices are less overwhelming. Usually plan investment options are selected and monitored by independent investment advisors who work with the plan fiduciaries—this translates into professional unbiased advisory services, which benefits all participants. A plan feature to consider, which will aid and encourage workers to keep money in the plan, is ad hoc withdrawals for retirees, allowing participants to access their accounts the same way they would in an IRA, and take money as needed. This is a balancing act, however, as the retiree still needs to be aware of the risks of removing money and should have a financial plan in place for retirement.

Employers and plan sponsors should think big. Rather than designing retirement savings plans for the length of time the employee is with the company, plans should represent a tool for lifetime retirement savings for all workers.

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