Designing Retirement Plans with the Ends in Mind

By: Eric Sondergeld

The 401(k), while not the first defined contribution savings plan type, was built to supplement, not replace, defined benefit plans by giving employees a means of saving for retirement. Today just 15 percent of private sector workers have access to a DB plan and 65 percent have access to a DC plan.[i] The former number is shrinking while the latter continues to grow. Assets backing these plans show a similar trend, with just $3.8T in private-sector DB plans compared with $11T in DC plans, 70 percent of which is in 401(k)s.[ii]

Before long, most new retirees will have little or no DB income and will instead need to rely more heavily on personal savings. If the 401(k) had instead been created as a replacement for the DB plan, would it have a nearly exclusive focus on accumulation, or would a focus on drawing income in retirement be more prominent in its design? Regardless, given the demise of the DB plan, perhaps retirement savings plans of all types should have an income focus, or at least an income component.

The End Consumer

While the 401(k) has undergone improvements over the years, the result is largely unchanged: participating employees reach retirement with an account balance. When an employee first joins the workforce, the prevailing advice is to participate in the company’s retirement savings plan and to contribute as much as possible. However, as employees approach retirement, differences among them and their respective financial situations become more apparent. As a result, there is no one-size-fits-all advice for what to do with the money in their retirement plan after they retire.

The End of One’s Career

One perennial question is whether participants should keep their assets in the plan when they leave the employer, particularly when they retire. According to Greenwald Research’s 2021 In-Plan Insights study, over a third of plan sponsors prefer that participants keep their retirement savings in-plan after they retire and an additional 4 in 10 have no preference. Yet over three-quarters of plan sponsors are at least somewhat concerned about the fiduciary and reporting responsibilities that come with participants electing to keep their assets in-plan during retirement. Fewer than half of participants prefer to leave their assets in their employer’s plan at retirement and one-third have no preference. Despite this preference, one-third plan to roll their balance into an IRA and just 2 in 10 plan to leave assets in their plan. There is obviously no correct answer to this question that can apply to all participants. Therefore, we need to design retirement plans in ways that serve all workers participating in them by aligning the interests of all involved, starting with plan participants.

If the focus remains on participants, then general preferences by others involved become less relevant. In fact, such preferences could get in the way of doing what is best for plan participants upon retirement, especially when it comes to deciding whether to add one or more retirement income options to the plan. If an advisor who sells a plan hopes to develop relationships with higher-earning employees, he/she may be reluctant to recommend the plan include an array of income options for people to choose from. Similarly, a plan sponsor who prefers participants take their money with them at retirement may be less open to adding such options as well. To the extent the advisor and plan sponsor are fiduciaries, these preferences become less relevant as they are bound to focus on what is in the best interest of plan participants.

One might argue that, to do what is best for plan participants, a plan sponsor should include multiple retirement income options to meet the retirement income needs of a heterogenous workforce. An outcome could include the following:

  • High-earning employees may still decide to work with a retail advisor, whether the plan’s advisor or another, to help them create a plan for retirement that encompasses their plan assets and those outside the plan.
  • Employees with multiple 401(k)s or IRAs and/or with a spouse who also has retirement savings may decide to consolidate their retirement assets with a single provider or advisor.
  • Employees with fewer assets or little access to professional advice outside the plan will benefit most by their employer offering a choice of options upon retirement along with advice and guidance for how to select the option that best fits their situation.

The interest is there, as nearly two-thirds of plan participants say they ‘need’ in-plan income options to have a financially secure retirement. A similar number express interest in ‘pension-izing’ plan savings.

As access to defined benefit plans drops, we must give American workers more opportunities to lead a financially secure life in retirement. Shifting our attention to the end goal of retirement income will build plans that make this possible.

Still curious about the state of retirement plans today? Learn more about the In-Plan Insights Research Program or contact Greenwald to start your own research initiative.


[i]2021 data from the National Compensation Survey, U.S. Bureau of Labor Statistics.
[ii]Retirement Assets Total $39.4 Trillion in Fourth Quarter 2021, Investment Company Institute, March 28, 2022.