Rollovers up in 2020, even as 401(k)s try to retain assets

The nationwide shutdown due to the pandemic last year led many companies to lay off workers — and there was a surge in rollovers from 401(k) plans to IRAs.

Last year, account holders moved an estimated $623 billion from their 401(k)s to IRAs, up from $565 billion in 2019, a 10% increase, according to a report Tuesday from Limra’s Secure Retirement Institute. The volume of rollovers also went up, going from about 5 million in 2019 to 5.3 million last year.

The group predicts that such rollovers will increase to $760 billion over less than five years.

Among people ages 40 to 75 who said they recently left jobs, about 60% initiated IRA rollovers, according to the Secure Retirement Institute. More than half of the people, 54%, reported that they started rollovers before leaving employment, with nearly a third of that group doing so at least 90 days beforehand. Participants with balances of $500,000 were more likely than those with smaller accounts to initiate rollovers before leaving their jobs, according to the report.

The survey includes responses from 2,000 workers who were contacted in November and December.

About a quarter of people who changed employment over the prior two years opted to leave their assets in a former employer’s plan. Their top reasons for doing so were convenience, indecision, being satisfied with the former employer’s plan and not needing the money, the report noted.

Three percent of people moved assets into an annuity after leaving a job within the previous two years.

Among those who made rollovers, 84% said they consulted with another person being making their decision, according to the report. About half of people talked to a financial professional, and that source of advice was also the biggest influencer in their decision, the survey found. People also conferred with friends, family, human-resources professionals and others, although those interactions played less of a role in their decisions, they said.

CHANGING ATTITUDES

While there has been an increase in money flowing out of DC plans, employers have become more interested in retaining participants, even into retirement.

Eighty-four percent of sponsors with plans with at least $500 million in assets said keeping participants was their preference, according to a report this week by Cerulli Associates.

That trend has been forming for years, as sponsors realize that the administrative burdens, if any, of retaining former employees in plans is often outweighed by benefits of having their assets stay in the plan. Doing so increases a plan’s bargaining power with service providers and investment managers, which can lead to lower costs for all participants.

To accommodate retirees, plans are considering income options for their menus. Relatively few include annuities, especially as part of a default investment for participants, but that could change as more products and services become available. The SECURE Act included provisions to make 401(k)s more annuity-friendly, although sponsors have been slow to add products their plans.

“Retiree-friendly plan features should arm participants with the planning tools, personalized advisory services, investment products, and withdrawal options necessary to support participants through their retirement years,” Cerulli senior analyst Shawn O’Brien said in an announcement of that report. More than half of retirees the company surveyed pointed to withdrawal features as the most important in their accounts.

About 14% of plans with at least 5,000 participants offer annuities as retirement income options, according to data from Vanguard’s How America Saves 2021 report. Smaller plans were slightly less likely to have annuities on their menus.

Meanwhile, 70% of the biggest plans offered ad-hoc partial distributions to retirees, something that was much less common among smaller plans, with only 21% of those with fewer than 500 participants having such a feature, according to Vanguard. Among all plans, 63% offered withdrawals other than required minimum distributions.

Larger plans are also more likely to try to retain employees’ assets after separation. A quarter of plans with 5,000 or more participants have policies to retain assets if accounts hold more than $1,000 when a worker leaves the company, and 72% have similar policies, with the exception of automatic rollovers for accounts with $1,000 to $5,000, according to Vanguard.