For each of the options below please discuss what actions (policy or otherwise), if any, could encourage more retirees to preserve their pension and retirement savings plan assets. Please discuss some of the potential tradeoffs, such as the effect on plan coverage, plan compliance, and effectiveness for preserving pension and retirement savings plan assets, of the options identified.
1. Options to encourage retiring participants to preserve their pension assets at retirement by deferring the receipt of benefits (i.e., leaving assets in an account balance), or rolling over assets directly to an IRA at retirement.
“Participants need investment advice, both for managing assets during the accumulation phase, but also in anticipation of and during their retirement. Investment advice provided through the workplace (in association with the employer’s pension plan – both defined contribution and defined benefit) is essential to achieve this goal. It is imperative that financial services firms that provide investment management or administrative services to plans be permitted to offer such advice to participants (who would be free to take or not take such advice). Participants’ 401(k) balances at retirement are often the largest source of retirement income they have (other than the equity in their homes), and they often need professional advice. It would be helpful if they have access to professional advice during their accumulation phase so that they have established a relationship with a professional advisor (whether or not through their employer plan) by the time they reach retirement age and need to make critical decisions regarding what to do with their retirement account balances.”
“Increase withholding above 20 percent (would suggest that it be based on the employee’s marginal tax bracket)”
“Increase the 10 percent penalty tax (perhaps a gradual phase down as employee approaches retirement age)”
“Options to encourage leaving assets in an account balance or rolling them directly to an IRA would most probably involve some sort of mandate or default provision. In other words, participants would not be allowed to take the money out in a lump sum when they separate from service. Rather, they would be permitted to leave the money in the plan, directly roll to an IRA, take money in an annuity or periodic payments (if eligible). If none of these options were chosen, the plan sponsor would default the money either into the plan or into a default IRA or annuity. Of course, if the plans were to hold the money or provide periodic payments, we are still left with the basic policy issue of individuals outliving their retirement assets. No option that doesn’t include annuitization will address this basis issue.”
“The emphasis of our initiative to encourage annuitization and preservation of retirement savings should NOT be directed at motivating retirees to defer the receipt of benefits (i.e. leaving assets in a retirement plan account) or rolling these assets directly to an IRA at retirement. These are the actions most retirees currently take with respect to their retirement plan balances. What the emphasis of any initiative should be is to find ways to assure that options that assure that participants don’t outlive their savings and provide guaranteed lifetime income are made available under qualified plans and become a minimum qualification standard. Since 401(k) and other types of defined contribution plans are no longer supplemental retirement arrangements, but rather are typically the primary source of retirement income, it is imperative that tax subsidies supporting these plans not be available unless the plan satisfies the requirement that they make available a distribution option that is designed to assure guaranteed lifetime income to retirees. Further and significantly, participants must be educated and informed through out their working lives about the risks of outliving their assets and the need to access and select distribution choices that address this risk at least for an amount that will provide for their daily living needs after retirement.”
“Prohibiting lump-sums either outright or by tax penalty certainly would encourage retirement account preservation.
“Simplifying the ERISA administrative rules probably would make (some) employers less inclined to encourage employees to close out their accounts by taking a lump-sum withdrawal or through an IRA rollover at termination or retirement.”
“I believe that it’s the smaller accounts that get liquidated. Intuitively, the larger the account balance the more likelihood of preservation, especially where the employee has no other substantial pension options.”
“If the employer’s plan investment options are not unattractive and the fee structure unreasonable, retention is more likely assuming the participant understands the significance and effect of fees on their account.”
“Mandates can be effective in procuring change but as they are arbitrary in application they can be unfair. For instance, 80% of participants may benefit from having a guaranteed lifetime stream of income; however 20% may not benefit given their individual circumstances (e.g. other sources of income, health status, lost economic opportunities). Mandates also may be politically difficult to pass.”
“Make it mandatory to rollover 401(k)s and cash balance plans into 401(k)s at the next employer, or into IRAs. This might reduce 401(k) participation; it might also increase loans from 401(k)s and IRAs. Firms with cash balance plans may become less attractive to mobile workers.”