This image shows a retiree walking with her daughter. Retirees are staying in defined-contribution plans years into their retirement.
Retirees are staying in defined-contribution (DC) plans long after retirement, according to T. Rowe Price. DC plans are typically tax-advantaged accounts, such as 401(k)s and 403(b)s, offered by employers. Advisors should understand why employees stay invested in these accounts years after retirement – and they should keep an eye on the financial solutions retirees seek from their DC accounts in the drawdown stage.
A financial advisor could help you create a financial plan for your retirement needs and goals.
What Are Defined-Contribution Plans?
This image shows a business woman. Employees may have access to defined-contribution plans such as 401(k)s through an employer.
Defined-contribution plans are typically tax-advantaged investment accounts offered by employers to help workers save for retirement. Common offerings include 401(k)s and 403(b)s.
DC plans differ from defined-benefit (DB) plans, or pension plans, which are managed by a professional and guarantee income in retirement. Defined-contribution plans may require an employee to opt in and include an employer “match.”
Typically, investors are penalized if they withdraw funds from the retirement plan before age 59.5.
Trends in Defined-Contribution Retirement Accounts
According to T. Rowe Price’s “2021 Defined Contribution Consultant Research Study,” investors tend to remain in their DC plans long past their retirement date.
The top three factors driving this trend include:
Lower costs compared with a rollover individual retirement account (IRA)
Flexibility when drawing down assets
Investments that generate income
Investors are also hooked by timely educational outreach, advisors available through the retirement plan and investments that generate non-guaranteed income while preserving financial flexibility.
“The emergence of DC-sourced retirement income paired with the existing infrastructure devoted to asset accumulation suggests a more comprehensive set of solutions targeted to deliver better outcomes for participants,” the study says.
Advisors and plan administrators may need to home in on the retirement income planning potential these plans hold.
“In this way, QDIAs (to save for retirement) and retirement income solutions (for living in retirement) may be conceptually linked,” the study says. QDIA is the acronym for qualified default investment alternative, such as a lifecycle fund, which may automatically enroll participants.
T. Rowe surveyed 32 consulting and advisory firms that provide services to more than 33,000 plan sponsor clients. They report nearly $7.2 trillion of assets under advisement.
What Investors Do With Their 401(k)s in Retirement
This image shows a woman reviewing her investments. Defined contribution plans allow for employees to contribute to a tax-advantaged retirement plan.
At retirement, investors typically weigh the benefits of leaving a retirement account with their current plan or rolling it to an IRA. Depending on their age and account types, they may also determine whether they’ll start taking distributions immediately or allow the account to grow.
The factors at play in making these decisions may include the account’s fees, investment options and the need to consolidate various retirement plans.
Savers and advisors may associate DC plans with the asset accumulation (or growth) phase of retirement planning. But as retirees stick with those plans into their golden years, advisors may turn their focus toward how these plans approach the drawdown phase.
Financial professionals should be aware of what’s keeping investors invested with their defined-contribution plans – and how that impacts their business model and bottom line.
Tips for Retirement Saving
It’s never too late to save for retirement, or to work with a financial advisor to maximize your retirement assets. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re still years or decades away from retiring, knowing where you stand on the path to retirement is still important. SmartAsset’s free 401(k) calculator can help you determine how much you can expect your savings to grow over time and how much you may have when the time comes to retire.
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