Plan Distribution Options Matter, Study Says
Plan design can influence and equip plan participants to make better choices regarding distribution, a recently released report concludes.
In “Design Matters: Plan Distribution Options,” the Defined Contribution Institutional Investment Association (DCIIA) examines distribution options and discusses recent research on the impact of plan design on participant behavior regarding distributions.
Decisions about plans’ distribution policy “can play a critical role” participants’ retirement outcomes,” says the DCIIA, adding that consideration is beginning to appear regarding “whether guiding participants towards lump-sum distributions, intentionally or unintentionally, through plan designs that encourage such distributions, is the most appropriate approach.”
The report that says that research indicates that when DC plans offer more distribution options than just a one-time lump-sum benefit payment, retiring plan participants take advantage of them. Other options include:
- periodic partial withdrawals;
- monthly/quarterly installment payments; and
- other flexible distribution strategies.
Offering such multiple options, the DCIIA argues, “can allow retired and other separated participants to readily turn their account balances into the type of income stream that best meets their individual financial needs.”
Another option the report suggests plans consider is allowing retirees to remain as plan participants. DCIIA says it is “a pivotal question” for a plan to consider whether it wants to encourage participation through retirement or instead actively encourage distribution of assets once after an employee separates from service due to taking a new job or retirement. “Importantly, allowing participants the flexibility to remain in the employer-based retirement framework can have significant benefits, not only for plan participants, but also for plan sponsors,” it says.Suggestions for Plans
The DCIIA notes that there is “significant discretion” in designing plan distribution policies, and encourages re-evaluation of plan distribution options “in the context of plans’ current and emerging goals.”
The DCIIA suggests considering the following questions:
- Do you want to keep retired and/or separated participants’ assets in the plan?
- Does the plan have an overall retirement income objective for participants? Should it?
- Does the plan want to provide solutions for participants so they will be able to create a retirement income stream for themselves?
- Is the goal to have those who separate from service for any reason — or only retirees — remain plan participants?
- What guidance or advice do you want to offer or make available to plan participants about choices and options?
The report also suggests the following steps:
1. Identify current “money out” options by reviewing the plan document.
2. Check whether the plan allows for partial withdrawals.
3. Evaluate whether the plan’s distribution options align with the plan’s goals and objectives.
4. Request that your recordkeeper perform an analysis of the actual participant distribution history in order to identify what participants have been doing with their accounts.
5. Examine demographic data to estimate how many participants will reach retirement
6. age in the next five, 10 or 15 years.
7. Consider incorporating retiree-friendly distribution features and determining what plan document changes would be required to introduce them.
8. Evaluate the treatment of beneficiary payments and whether the only distribution option is a lump-sum withdrawal.
9. Consult with your recordkeeper to determine their best practices and what is possible for your plan.
10. Communicate to participants whatever changes you make to the distribution options.
The DCIIA also considers education to be critically important. “Educating plan participants about the pros and cons of all the options available to them through their DC plans’ distribution strategies is critical in helping them to understand the implications of the choices they will make,” it says. It adds that “Engaging participants is a key driver of improving financial wellness and decision-making over all phases of plan participation” and is especially important in the case of employees nearing retirement.