401(k) tips: designing for decumulation

401(k)s are a powerful accumulation tool, but getting baby boomer participants to retirement without helping them decumulate puts decades of hard work and saving at risk. Plan sponsors must focus on the problem of how participants can safely draw down their 401(k) balances in the face of unpredictable returns, uncertain inflation, and an unknowable life expectancy.

Many retirees are uncertain about how to withdraw money from their 401(k)s, which results in baby boomer retirees leaving 401(k) plans sooner than needed, along with the potentially lower administrative and investments costs and Employee Retirement Income Security Act of 1974 (ERISA) protection that the plans provide. Keeping retirees and their assets in a plan can also help the plan sponsor control plan service and investment costs.   

Three challenges for preretirees taking money out of their 401(k)s

Once they reach retirement, participants face three challenges.

1   Deciding how much they need from their 401(k) plan to live their desired retirement         lifestyle 

2   Deciding how to invest in retirement to ensure that their assets don’t run out 

3   Deciding how to actually withdraw money out of their 401(k)  

The first challenge can be met using rules of thumb (e.g., by targeting 80% of preretirement income), which are handy, but imprecise. A better approach would be estimating expected spending, which could be done a number of ways, including using current outlays as a starting point. But the truth is, whether it’s using a rule of thumb or a more personalized method, most participants just don’t plan.¹  

The second challenge is harder. Participants must invest in a way that balances the preservation of principal, ability to generate income, and opportunity for growth over time. These objectives are somewhat mutually exclusive. Principal-preservation investments won’t grow in excess of inflation, and growth investments are volatile.  

The third challenge involves arranging distributions from a 401(k) plan, a decision that’s constrained by the withdrawal alternatives offered—or not offered—through the plan.  

Designing for decumulation: three tips 

Tip 1: offer the right tools 

A personal spending projection tool, or personalized advice, can help participants determine how much they’ll need to withdraw from their 401(k)s. 

Tip 2: offer advice and a variety of investments  

Specifically, provide decumulation advice that includes personalized spending projections and investment advice specific to the needs of investors seeking to balance safety, income, and long-term growth. An advice tool can help employees balance these efficiently. Implementing decumulation advice requires high-quality conservative investments, such as a stable value fund, a short-term investment-grade bond fund, and—for very short-term needs—a money market fund.  

Tip 3: offer flexible withdrawals  

Flexible withdrawals mean a variety of distribution options, such as ad hoc partial distributions and installments.

Conclusion: design for decumulation 

Designing for decumulation means making your plan more retiree friendly by offering retirement spending projection tools, investment and drawdown advice, a variety of distribution options, and appropriate investment choices.  

This helps benefit not only baby boomer retirees, but also active participants. The more assets that stay in the plan, the greater the leverage a plan sponsor has in negotiating investment and service provider fees, which may benefit everyone in the plan.  


1 John Hancock Financial Wellness Assessment, 2019.  

This content is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. John Hancock does not provide investment, tax, or legal advice. Please consult your own independent advisor as to any investment, tax, or legal statements made. 

Investing involves risks, including the potential loss of principal. There is no guarantee that any investment strategy will achieve its objectives. Past performance does not guarantee future results. 


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