Society management

More members keep their assets in DC plans after retirement

A new study on DC plan member activity has found a sharp increase in the number of plan members remaining in their plans after retirement.

JP Morgan Asset Management’s Retirement by the Numbers study results show that 42% of participants leave balances in their CD account within three years of retirement. This represents a significant increase from 28% in 2018 and more than double the percentage in 2009 (20%).

Further supporting the idea of ​​staying in a plan, the survey of plan members in 2021 found that up to 85% of respondents said they were at least “somewhat likely” to stay in their plan after retirement. ‘There was a retirement income option in the plan. . In contrast, the company’s early studies showed that most plan members withdrew all of their plan assets within three years of retirement.

At the same time, the income needs of retirees as they transition into retirement are higher than popular belief and do not remain constant but decline with age, the study notes. JP Morgan found that retirees spend at higher levels than expected in the early years of retirement, and suggests retirees should plan to have to replace more than 90% of their working income in retirement. The company notes that this is a significant increase from the widely accepted standard of 70% to 80%. This number gradually decreases in retirement, to 70% at age 85.

This new report combines the “Ready! Fire! Purpose? ”Research with an overview of household spending patterns to provide a comprehensive view of how individuals use their DC plans as a savings vehicle and how they also spend as they move into retirement .

Contribution rates and withdrawals

Meanwhile, most people are still not contributing enough to reach secure funding levels, with average starting contribution rates starting at 5% and never reaching 10% before retirement, according to the report.

“We can see from the first Retirement by the Numbers report that retirees need a lot more savings to meet higher than expected spending needs in retirement,” says Katherine Roy, chief retirement strategist at JP Morgan Asset Management. “In light of these results, it is essential that plan sponsors consider incorporating features such as automatic contribution and indexation to increase delayed contribution rates. ”

Roy further notes that as more plan members retain assets in their plans after retirement, the tools to help plan members reduce their retirement expenses will prove increasingly valuable.
Research also found that a modest number of active members over the age of 59 and a half make pre-retirement withdrawals, although the number is still notable and the average amount of withdrawals remains large. A range of 6% to 10% of participants over the age of 59 and a half have withdrawn, on average, 55% of their assets, the study notes.
Implications

JP Morgan notes that the findings have several implications for the design of the target date defined contribution fund slippage plan. For example, the company suggests that plans can help plan members help themselves through greater use of automatic contribution and indexation programs at much higher starting levels and lower rates. increase higher than those generally used today. In fact, the company’s biennial participant survey released earlier this year found that participants largely believe they should be saving more than they are. Additionally, almost everyone who auto-signed up with Auto Escalation said they were happy with this approach.

Plan sponsors should also consider how these behavioral trends are likely to interact with their TDF selections to better understand the type of descent path designs that may best position plan members for retirement funding success. The company suggests that the average participant needs a much higher savings balance to realistically reach at least a minimum level of adequate replacement income.

Based on its understanding of the savings and spending habits of plan members, the company notes that it plans to evolve the trajectory of its Target Date SmartRetirement line of funds, increasing equity allocations while maintaining broad diversification and reducing risk over the years to come. retired.

Additionally, as more plan members use their plans as post-retirement investment vehicles, it is important to consider how the separate phases of accumulation and disbursement work together, to help improve the member experience.

The research is based on the actual savings and withdrawal patterns of approximately 4,500 DC plans with more than 1.4 million participants. Retiree spending data comes from more than five million anonymized households at JP Morgan Chase Bank.