Capital Ideas^™ 
Investment insights from Capital Group

As your plan participants approach retirement, their focus is likely to shift. While building a nest egg was their main concern for many years, they will begin to wonder about concrete steps they can take to lower investment risk, organize their retirement finances and manage distributions from retirement accounts. Here are three common questions they may ask.

My retirement investments have done well over the years, but I don’t want to risk losing it all just before I retire. What should I do to protect myself?

After years of saving and investing, it’s natural for participants to feel some trepidation as they approach retirement. Having lived through past market drawdowns, they may fear a “black swan” event that could upend their retirement plan just as they’re ready to leave the workforce.

Tell them there are concrete steps they can take now to better preserve their retirement portfolio. For one, they can use the period leading up to retirement to lower their investment risk. It may be a good time to consider increasing the percentage of their portfolio in bond funds or other investments designed to provide regular income. Still, they should consider keeping a certain amount invested in equities to seek enough growth to fund what may be a long retirement. 

Participants nearing retirement should also review the types of stocks they own. They should consider putting more emphasis on dividend-paying stocks that can generate income and reduce their exposure to riskier growth stocks. If participants are unsure how to do this, you could suggest a target date fund, which attempts to balance investors’ needs for growth and conservation of capital. A target date fund can serve as a single, diversified investment, with its allocations to stocks and bonds based on the participant’s time horizon. Fund holdings are automatically adjusted over time as participants near their retirement date and may even be managed through retirement.

This is also a good time to address the potential for market volatility. Remind participants that retirement will be a long journey and that a few weak investment years likely won’t derail their retirement savings plan. Also remind them that time, not timing, is what matters most. While severe drops in the stock market can be difficult to watch, if they stick to their long-term investment plan, they should be in a better position to meet their retirement goals.

I have a retirement account from a former employer and some other retirement savings. Should I consolidate my accounts?

Combining accounts from multiple employers is easy to do and can simplify participants’ financial lives by putting their retirement savings in one place. That means fewer statements, fewer investments to keep track of and usually fewer fees. However, there are some important factors that participants should carefully consider before consolidating accounts:
 

• Investment options under each plan
• Fees and expenses
• The different levels of service available under each plan
• Potential tax consequences

How do I prepare to take distributions from my plan?

It’s important for plan participants to understand that taking income in retirement (distribution) requires a different strategy than saving for retirement (accumulation). They should also be aware of the rules and regulations surrounding distributions.

The Internal Revenue Service generally requires that participants make annual withdrawals of tax-deferred money they have accumulated in non-Roth retirement accounts once they turn age 73. These required minimum distributions, which are based on life expectancy and account balances, are designed to help gradually pay the taxes owed on those assets. The rules differ depending on the investor’s mix of retirement savings accounts.

For employer-sponsored retirement plans, participants have several options: cash out with a lump-sum distribution, leave savings in the plan, move savings into a rollover IRA and, if they should rejoin the workforce, move savings to a new employer’s plan. The available options may depend on your retirement plan’s terms.

Many retirees leave the workforce with savings in both after-tax and tax-deferred retirement accounts. If they have enough income from after-tax accounts and other sources, they could consider taking distributions from their tax-deferred accounts last. 

When answering this question, it can also be helpful to ease participants’ fear of the unknown. Distributing funds from retirement accounts is much different than accumulating for retirement. It’s natural for participants to feel uneasy. Let them know that they can continue to get help even after they leave the company.