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Vying for Retiree Assets

Relatively few plan sponsors encourage retiring employees to leave money in the company 401(k) plan once they quit their jobs. With the first wave of the Baby Boomer generation rapidly approaching retirement age, however, plan sponsors may want to reconsider their passivity.

Many retirement specialists say retiring Boomers can benefit themselves as well as the remaining active participants in their 401(k) plans and even the plans themselves by leaving their money where it is. Boomers benefit because the typical 401(k) offers lower operating costs and better ancillary features, such as loan programs, than their most popular alternative, Individual Retirement Accounts. Active participants benefit because the more money a plan has, the more leverage it enjoys when negotiating fees and services from vendors. In addition, plan sponsors benefit, if only indirectly, because Boomers who maximize their retirement assets by leaving them in their 401(k) plan have more to spend in retirement, thus helping the economy and corporate profits.

However, the prospects for holding onto retiree money aren't bright if current trends don't change. According to Brightworks Partners, a financial services consulting firm based in Old Greenwich, Connecticut, only about 27% of workers with account balances exceeding $25,000 leave their money in their 401(k) plan once they retire. By contrast, approximately twice that many take their money out entirely; 45% roll their money into an Individual Retirement Account, 7% take a lump sum distribution, and 9% purchase an annuity. The remaining 12% of retirees take out part of their account balances and leave the rest invested in the plan, or arrange for their money to be paid to them in installments.

It is possible for sponsors to do a better job of retaining plan assets report three plan sponsors. For example, at Eastman Chemical Co., a specialty chemicals and plastics company headquartered in Kingsport, Tennessee, more than 80% of retirees keep their money in the company's $1.1 billion 401(k) plan, according to Ralph Egizi, the company's director of benefits finance and foreign exchange. At telecommunications giant AT&T Corp., retirees hold 49% of the assets in that company's 401(k) plan, says Mark Devine, senior vice president of the company's AT&T Investment Management Corp. subsidiary. And at General Motors Corp., retirees represent about 29% of the participants in the company's defined contribution plan for salaried employees and 24% in the plan for hourly employees, according to Charles Tschampion, managing director of defined contribution plans for the automaker's General Motors Investment Management Corporation subsidiary.

All three companies attribute the high level of retiree participation in their retirement plans to efforts their firms have taken to attract and retain retirees as investors. AT&T has enhanced its loan provisions for plan participants, and also made financial planners available to departing workers. All three companies tout the flexibility of their plans in terms of the number of investment options available to participants. "We have 73 active investment options in our plan," says GM's Tschampion. "We make people aware of the benefits of staying with the plan," adds AT&T's Devine.

Not surprisingly, retired 401(k) plan participants tend to be conservative investors. At AT&T, retirees hold about 45% of their assets in Stable Value funds, versus 25% for active employees. At Eastman Chemical, retirees have about 54% of their assets in Stable Value, versus 38% for active employees. A comparable spread exists among participants in the savings plan for salaried employees at General Motors. Active employees in GM's hourly plan are nearly as conservative as their retired counterparts, though; they hold 38% of their assets in Stable Value, versus 48% for retirees.

Egizi, Devine and Tschampion all say the presence of large numbers of retirees in their 401(k) plans has not created any problems for the plans in terms of meeting cash outflows from Stable Value funds. This was true, they say, even though retirees, unlike active participants, typically withdraw money from their accounts rather than contribute money. Each plan has had net positive cash inflows into their Stable Value funds recently, and AT&T's Devine pointed out that even when there has been a net outflow of funds from Stable Value in the past, his fund's cash buffer has been adequate to meet the liquidity needs.

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