More Retirees Take the Gold Watch, But Keep Their 401(k) Assets In-Plan

A recent Fidelity report reveals that over 80% of plan sponsors prefer to allow employees to keep their assets in-plan and withdraw them over time. The number of workers aged 55 and older has increased by 74% over the past two decades, prompting plan sponsors to focus more on how participants transition from saving for retirement to living in it.

60% of retirees using Fidelity’s platform stayed in their employer-sponsored plan within the first year after quitting their jobs as of December 2022, a 10% increase since 2013. Pre-retirees (those between the ages of 50 and 59) exhibit a similar pattern, with record-kept assets for those over 50 tripling in the last ten years.

According to the report, “[Retirees and pre-retirees] may be choosing to stay in plan for a number of potential reasons… The simplification and consolidation of their retirement accounts, familiar and well-priced investment options, potentially lower fees, access to managed portfolio services and advice, educational content, or recordkeeper familiarity.”

Additionally, 62% of plan sponsors consider offering retirement income options at least somewhat important. In order to give retirees a steady income, many are looking into target-date funds with guaranteed income through annuity purchasing choices.

These products gained traction following regulatory changes in 2019. In fact, a separate report from Sway Research found that target-date collective investment trusts with annuity components now exceed $22 billion in assets. Fidelity is among the recordkeepers offering BlackRock’s LifePath Paycheck products, which hold the largest share of these assets. Fidelity also found that 23% of plan sponsors currently offer guaranteed income options within defined contribution plans at retirement. Less common are managed payout funds, annuities participants can purchase during their working years, and guaranteed income marketplaces outside of defined contribution plans, which allow participants to allocate rollover assets.

More than half of plan sponsors offer ad hoc withdrawals, while about a third provide managed accounts designed to help generate retirement income. To analyze defined contribution trends, Fidelity examined data from 25,000 corporate retirement plans covering 23 million participants, 10,000 403(b) plans, and plan sponsor surveys conducted last year Amazon.com Inc. and the administrative committee overseeing its 401(k) savings plan have been hit with a class-action lawsuit alleging improper management of employee forfeiture funds. The lawsuit, Curtis v. Amazon.com, was filed in the U.S. District Court for the Western District of Washington and claims that Amazon fiduciaries engaged in self-dealing by using forfeited plan assets to reduce the company’s own contributions rather than lowering administrative fees for participants.
According to plaintiff Cory Curtis, who is being represented by Terrell Marshall Law Group PLC, Amazon misappropriated millions of dollars in forfeited 401(k) assets between 2018 and 2023. The complaint argues that instead of using the funds to offset administrative expenses—such as recordkeeping fees, investment management fees, and transaction fees—or redistributing them to eligible participants, Amazon applied them toward its future employer contributions, effectively saving the company millions.

Amazon’s 401(k) plan is among the largest in the country, with over $17 billion in assets and more than 1.3 million participants, according to its 2022 Form 5500 filing. The plan was previously administered by Vanguard Fiduciary Trust Co. until January 7, 2020, when it transitioned to Fidelity Investments, which remains the recordkeeper as of the end of 2023. In 2023, the plan also incurred administrative expenses by paying Strategic Advisors—an affiliate of Fidelity—direct compensation for plan-related services.

The lawsuit claims that Amazon’s plan agreement permits fiduciaries to utilize forfeited funds in one of three ways: to restore forfeited accounts, to pay administrative costs, or to lower future matching payments. However, rather than reducing participant fees, the complaint argues that Amazon largely utilized the money to offset its own contributions.

The use of 401(k) forfeitures is the subject of a larger wave of litigation, including this case. Since 2023, over 30 similar lawsuits have been brought against large companies, including Qualcomm Inc., HP Inc., and Honeywell International Inc. Courts have ruled in favor of plan sponsors, such as BAE Systems Inc., Thermo Fisher Scientific Inc., and Clorox Co., dismissing many of these lawsuits.

Legal and industry experts have expressed skepticism about the lawsuit’s merits. Daniel Aronowitz, president of fiduciary insurance firm Encore Fiduciary, argues that these cases are attempts to exploit ERISA regulations. He points out that Amazon’s plan offers some of the lowest fees in the country, recordkeeping fees are only $21 per participant, and Vanguard target-date funds cost between three and four basis points, significantly lower than industry averages. “This is just plaintiff law firms trying to weaponize ERISA, and that’s what’s happening in the modern era with the surge of cases in the second half of 2024,” Aronowitz says. “We find [it] really offensive for Amazon plan fiduciaries to be accused of somehow harming participants. They’ve done everything to ensure the lowest possible fees for their participants.”

In 2023, the IRS reiterated that 401(k) forfeitures may be utilized for participant allocations, plan costs, or employer contributions. In spite of this, the lawsuit demands that Amazon disgorge all profits it allegedly made from managing forfeited cash, fire fiduciaries who are believed to have violated their obligations, and take additional corrective action.

Amazon spokesperson Montana MacLachlan responded to the lawsuit, stating, “While we’re still reviewing the details of this case, we believe these allegations lack merit. We look forward to proving that through the legal process.”

The growing number of forfeiture-related lawsuits has raised concerns about regulatory oversight. Aronowitz criticized the Department of Labor (DOL) for allowing what he calls “regulation by litigation,” arguing that the agency should step in to clarify its position. “The Department of Labor and the IRS have regulations that have blessed this practice [of allocating forfeitures to employer contributions] for years and years,” he says. “What needs to happen is they need to consolidate these cases before one judge and get one ruling.” As the legal battle unfolds, the case against Amazon could set a precedent for how courts interpret the use of forfeited
funds in large retirement plans. If the lawsuit proceeds, it may influence fiduciary practices across the industry and prompt further regulatory scrutiny.

Sources
https://www.ignites.com/c/4767714/644054/more_retirees_take_gold_watch_leave_assets