Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > Asset Managers

Gen X, Y Driving DC Contributions and Rollovers

Your article was successfully shared with the contacts you provided.

The average defined contribution (DC) participant holds 38% of their investable assets — the equivalent of about $147,000 — within an employer sponsored retirement plan, according to research from Cogen Reports.

And, the research shows that the proportion of total assets that the DC plan represents increases as the investor gets older. Second-wave baby boomers hold about half of their total investable wealth in DC plans on average.

Linda York, vice president of syndicated research for Cogent Wealth, reviewed highlights of two recent Cogent reports — the DC Participant Planscape and the Investor Rollover Assets in Motion — research on investors and participants with employer-sponsored retirement plans assets during a recent webinar.

“It’s important to keep in mind that these DC plans are a very substantial and important part of participants’ overall wealth and financial security,” York said. “It’s also important to note that the majority of investible assets are held outside the plan, indicating the potential opportunity for providers to encourage consolidation as well as the potential risk that your participants may choose to roll their plan assets with another firm when the time comes.”

There is some positive action from participants in defined contribution retirement plans that York identified during the webinar.

According to the DC Participant Planscape, nearly a third (32%) of participants increased their DC plan contributions in 2014, which York said was 11% more than the 21% who expressed the intention to do so in 2013, in the 2013 survey. It’s also up from the 27% of participants that increased their DC plan contributions in 2013 and 2012 respectively.

York makes sure to point out that the real drivers of these increases are the Gen X and Gen Y investors. Among the Gen Y investors, 35% of them bumped up their contribution levels last year. More than a third (33%) of Gen X investors also bumped up their contribution levels last year.

“We think this is likely due to the improved economic climate in the U.S. and growing account balances that participants have seen thanks to the positive market performance — all of which is encouraging people to invest more in their DC plans,” York said.

The DC Participant Planscape report also shows that about a quarter of participants who had not made an increase within the past year plan to increase their deferrals in 2015 — and among those the Gen X participants are making the most waves, with 28% of them planning on bumping up their contribution rates this year.

“And keep in mind,” York added, “that the oldest Gen Xers are turning 50 this year and are entering their peak earning years, so these contribution increases can quickly add up to significant account growth.”

Former plan participants

Another audience covered within the participant planscape report is former plan participants — that is, individuals holding at least 5,000 in a former employer’s plan. York said these participants are asked “specifically about their intentions with that money”—whether it be to leave it in the plan, roll it into an IRA with their current provider or another firm, roll it into their current plan that their participating in or simply cash it out and take the tax penalty.

The good news: York said, “Overall we find that firms are poised for net increases with 44% of former plan participants planning on intending to leave their money just where it is and another 14 % likely to open an IRA with their former plan provider — resulting in a ‘net in’ score 58%.”

The not-so-good news: That ‘net in’ score is an average, which York elaborates that the actual “net in” scores for individual providers ranged from a low of 35% to a high of 88%. “So there is quite a disparity in the stickiness of customer relationships among the 20 firms we evaluate,” she said, “as a 35% net in corresponds with a potential 65% of participants planning to move their money out.”

Cogent’s Investor Rollover Assets in Motion report also addresses this matter of former plan participants—albeit this time through a different lens with an audience of affluent investors with $100,000 in investable assets. This report specifically focuses on the attitudes and behaviors of investors holding a portion of their assets in DC plans of their former employers.

Of the affluent investor population, roughly a third have an account with a former employer-sponsored plan.

The assets associated with these former employer sponsored plan accounts represent about 35% of the total investable assets among this population of investors—and “this is important because by definition these assets are eligible to be rolled over into an IRA,” York said.

The report then assesses their likelihood to roll funds over into a rollover IRA within the next year as well as the average value held in these former employer sponsored accounts. And here’s what the report found: 1 in 2 affluent investors with a balance in a former employer-sponsored plan expects to rollover assets in the next year, with an overall average balance of $102,000.

“We again see a brighter opportunity with the younger investor cohort as a result of early career exploration and job switching—Gen Y and Gen X investors hold the largest proportion of their total assets in former [employer sponsored retirement plans],” York said. “And while it’s true that older cohorts tend to have the greatest overall ESRP account value, those assets can be harder to uproot.”

And the report found that the younger the investor, the greater the intent he or she has on actually moving those assets to a rollover IRA. In fact, 61% of Gen X investors and 74% of Gen Y investors with former ESRPs plan to roll funds into a rollover IRA in the next year.

“Moreover, we found that the younger investors back up their willingness to rollover with action,” York said. “Gen X and Gen Y investors with former ESRPs report taking the most action to prepare for a rollover over the past year, including researching rollover options online, talking to a financial advisor, and contacting the former employer for a rollover kit.”

The DC Participant Planscape report, published in December 2014, is based off of 5,000 quantitative interviews targeting current and former DC participants, who are 18 years or older and actively contributing to a DC plan and/or having at least $5,000 in a former DC plan.

The Investor Rollover Assets in Motion report, also published in December 2014, looks at the results from a web-based survey among a representative cross section of more than 1,500 affluent US investors with investable assets of at least $100,000 (excluding real estate) who hold assets in former employer-sponsored retirement plans.

—Related on ThinkAdvisor:


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.