Distribution Patterns from 401(k) Plans

I read this morning about target date funds (TDFs) being designed to match up with patterns of distributions that participants are taking. The understanding of these patterns of distribution has been discerned from actual participant behavior. This is good.

Loyal readers though know that I rarely write about anything that's good. So, what's up? Why is John wasting his time on this topic?

As we all know, the past may not be the best predictor of the future. Over time, it may be, but not necessarily in the short run.

If we consider older workers -- for this purpose, I'm going to use this term to apply to anyone in the work force who is at least 50 years old. What do we know about them?

• Many of them have accrued benefits in defined benefit (DB) plans, even if the plans have been frozen or terminated recently.
• A reasonable number of them experienced the insane run-up in equity markets during at least part of the 90s. I don't think we will ever see anything like that again.
• Very few of them have much, if any, money in Roth accounts.

All of this is changing. The wave of the future is much more likely to be that participants have more money in Roth accounts, that they do not have the annuity stream from DB plans, and that very few have surpluses from a prolonged bull market.

As most of you know, currently, penalty-free distributions are generally available as early as age 59 1/2 and required distributions begin at age 70 1/2. When these provisions were put into the Internal Revenue Code, many participants were retiring before age 60 and few worked even close to age 70. Today, this is not the case.

It occurs to me that in the future, participants are going to need a more systematic means of distribution that can be delayed significantly. Part of it leads to new designs of TDFs. Part should lead to changes in the Code.

I plan to comment more on these topics in the future, but that's it for today.