As a growing number of baby boomers retire, American employers are requesting that their soon-to-be-former employees not cut the ties between them entirely. It is becoming increasingly common for companies to encourage retiring workers to keep their 401(k) plan assets under the management of the firms, the Wall Street Journal reported Sunday.
The trend has strengthened as companies seek ways to combat the expected withdrawal of trillions of dollars likely to come as baby boomers continue to retire — and pull out their assets — within a comparatively short period. It is an important consideration because the lower a firm’s assets, the harder it is for it to negotiate reasonable fees with the money managers that run its retirement-savings plan.
Baby boomers hold about $4 trillion in their defined-contribution retirement plans overall, the Journal said. In 2013, withdrawals from 401(k) plans outpaced new deposits into them, government data showed. Baby boomers are now between 52 and 70, while 10,000 Americans retire every day, meaning the pace of withdrawals is likely to speed up.
Traditionally, companies have not wanted to deal with either the costs or the hassles of managing their former employees’ 401(k) plans. They thus encouraged employees to pull out the assets in the plans upon retirement and invest them elsewhere, such as in Individual Retirement Arrangements. During the past decade, however, employers have moved some of the investment-related expenses to their employees, so the baby boomers and younger workers are helping make it worth their while to keep retirees' 401(k) plan assets on the books.
Some companies such as International Paper Co. have begun sending “stay-over” letters to workers close to retirement age, the Wall Street Journal reported. These letters are a play on the idea of “rollover” letters that companies send explaining how to move 401(k) plan assets to new investment vehicles.
“You’re leaving IP,” the company’s letter reads. “But that’s not where our story has to end.”
If companies are successful in moving to this new model, then financial advisers who have been hoping their businesses will increase with the retirements of the baby boomers could see the dashing of those hopes.
Meanwhile, some companies have indicated the trend could help close a gap in the incomes of U.S. retirees. About 40 percent of households with people between 55 and 64 have nothing saved for retirement, and those who have saved frequently don’t have enough to live on once they stop working. Because of this fact, many employers have seen employees working longer, which has pushed up the average ages of their workforces. These firms are hoping that by allowing retirees to keep their 401(k) plans with their former employers, some Americans will feel more comfortable deciding to retire.