You're ready to retire. But should your 401(k) keep working?

Employers are amending rules and offering services to keep retiree money in company-sponsored plans.

  • By Anne Tergesen,
  • The Wall Street Journal
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As baby boomers leave the workforce, more employers are trying to persuade them to stick with their 401(k) plans during retirement.

In the past, most 401(k) plans had policies that encouraged retirees to transfer, or roll over, their savings to an individual retirement account.

But now, company-sponsored retirement plans are introducing features to entice employees to leave their savings where they are. That is because when plans lose assets, employers have less bargaining power to sharply drive down 401(k) fees in negotiations with fund providers, harming employees who remain in the plan.

More employers are amending their 401(k) rules to encourage retirees to keep their money in the plans—for example, by giving them the ability to withdraw any portion of their balance at any time. Many are adding services that provide financial advice, like help turning a nest egg into a stream of lifelong income. Others are launching campaigns designed to convince retirees of the benefits of remaining in a 401(k), including access to lower-cost investments and additional creditor protections.

“Don’t move!” reads a brochure aimed at retirees from the nation’s largest 401(k)-type plan, the federal government’s Thrift Savings Plan. “TSP’s administrative costs are lower than those of similar plans.”

In the past, employers were fine letting employees retire and take their balances with them. There is a cost to mailing former employees account statements and tracking down those who move, said Rob Austin, director of research at 401(k) record-keeper Alight Solutions LLC.

But he said retention is now a growing priority. Among employers surveyed by investment-consulting firm Callan LLC, 38% say they want to keep retirees in their 401(k)s, up from up from 29% in 2016.

In 2014, overall 401(k) plan distributions exceeded contributions for the first time, according to consulting firm Cerulli Associates. The net outflows have largely persisted since. Between 2012 and 2017, withdrawals increased by 8.4% a year, on average, while contributions rose by a 6.4% annual rate, Cerulli says.

To stem the tide of retiree switchovers, 401(k) plans are adding flexible distribution options, similar to those offered by many IRAs. In the past, many plans forced retirees wanting to take any money out to remove their entire balance. Now, according to a recent survey of 333 employers by Alight, 66% offer retirees the option of taking regular monthly, quarterly or annual payments. That is up from 52% in 2007.

Nearly 70% allow retirees to withdraw any portion of their balance at any time, up from 41% in 2007. Vanguard Group found that participants who retired in 2010 with flexible distribution options had nearly 50% more in their former employers’ 401(k) plans in 2015 than those without access to such features.

On Sept. 15, the federal government’s $560 billion Thrift Savings Plan will begin allowing retirees to take as many as one unscheduled withdrawal a month. Current rules permit only one such distribution over a participant’s entire time in the plan.

Federal retirees will also be able to receive monthly, quarterly or annual checks and change the amount any time. Under current rules for regular payments, only monthly installments are permitted, and the amount can only be changed between Oct. 1 and Dec. 15.

In a 2015 memo recommending the change, the plan’s former executive director, Greg Long, wrote that in 2013, former employees transferred $9 billion from the TSP to other institutions, with virtually all of the money moving into “accounts with higher expenses than are available with the TSP.”

To make clear the benefits of staying with TSP, the plan distributes a worksheet to departing employees that asks them to compare the TSP’s fees and investor protections with alternatives.

To further help retain people’s retirement funds, employers are also adding some advisory services. Often, retirees decide to hire a financial adviser and roll money over to an IRA, with the adviser receiving a fee—generally 1% of the account’s balance—to manage the money. So that 401(k) participants will also have access to advice, more employers are adding so-called managed accounts. These pair portfolios devised by algorithms with human helpers at call centers and charge about 0.4%, on average.

Currently, 47% of plans offer a managed account service that helps people figure out how to make their money last in retirement, according to Alight.

In addition to encouraging people to stay with its retirement plan, TSP allows both participants and retirees to transfer money into the plan from their IRAs.

Before deciding whether to transfer money from a 401(k) to an IRA, it is important to weigh the cost and quality of the advice available under each option, as well as the following factors.

Fees: Many 401(k) plans offer low-cost investments, including institutional share classes of mutual funds that are off-limits to individual investors, said Jean Young, senior research analyst at Vanguard.

While IRA investors pay an average of 0.61% for stock funds, 401(k) participants pay 0.45%, according to the Investment Company Institute, a trade group for the mutual-fund industry.

An investor who pays 1 percentage point more in fees will amass 20% less in savings over a 40-year career, according to the Center for Retirement Research at Boston College.

Before making a rollover decision, ask your employer for the quarterly fee-disclosure statement that lists participant fees, including investment-management and administrative charges. Compare that to the cost of an IRA, including commissions and account-maintenance and investment-management fees. It is possible to find a very low-cost IRA, so be sure to compare prices.

Investment options: IRAs offer thousands of investment options. But this can create headaches for those who don’t know how to evaluate them. Employers are fiduciaries who are legally obligated to monitor the funds they offer, says Mr. Austin from Alight. “You don’t have the same protections with an IRA.”

Simplicity: An IRA offers a way to consolidate multiple retirement accounts in one place and see all of your holdings on one statement. If you like your 401(k), your employer likely will allow you to do the same thing within the plan.

Early access to your money: Those who leave an employer at age 55 or older can generally tap their 401(k) accounts without paying a 10% early-withdrawal penalty, says Ed Slott, an IRA specialist in Rockville Centre, N.Y. In contrast, with an IRA, the 10% penalty applies before age 59½. (In both cases, investors owe ordinary income tax on their withdrawals.) Unlike an IRA, most 401(k) plans offer the option to take a loan.

Creditor protections: Federal law protects the assets in 401(k)-style accounts from creditors and legal judgments. But because IRAs are governed by state law, protections vary, says Mr. Slott.

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