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Why 401(k) Growth Is Flattening

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The 401(k) market has experienced flattened organic asset growth (excluding the effect of market performance) since 2013, according to new research from Cerulli Associates.

Total distributions or outflows from the 401(k) market expanded at a five-year compound annual growth rate of 8.4% from 2012 through 2017, while total contributions or inflows expanded at an annual rate of 6.4%.

Cerulli director Jessica Sclafani puts this negative flow environment down to demographics and the market’s maturation.

Sclafani noted in a statement that baby boomers account for the increasing rate of outflows as they enter retirement. They are starting to draw down their 401(k) accounts or are rolling over the entire account balance to the retail IRA market.

Indeed, older investors are supporting continued growth in IRA rollover contributions, according to the research. Cerulli research shows that between 2012 and 2017, traditional IRA account assets grew by some $2.9 trillion, thanks to 20% growth in net flows (which it called organic growth) and 80% to market appreciation (inorganic growth). Rollovers comprised 95.6% of inflows, while investor contributions accounted for just 4.4%.

Today, the boomer segment of 401(k) investors is being replaced by millennials, but younger investors typically defer a smaller percentage of a smaller salary to a 401(k) plan, according to Sclafani.

“This creates a big accounts out/small accounts in dynamic in which large balance 401(k) accounts are exiting the 401(k) market for the retail IRA market and are being replaced by small starter-balance accounts,” she said.

Sclafani noted that it would take 10 millennials earning $50,000 and contributing 3% of their salary to replace one boomer earning $100,000 and contributing 15% of salary.

Maturing Market

The 401(k) market turned 40 years old in 2018, according to Cerulli. “Asset managers and recordkeepers that participate in the 401(k) market will need to be conscious that while the 401(k) market will continue to evolve in terms of plan design and ability to serve participants through retirement, it is now a mature segment,” Sclafani said.

In a fourth-quarter survey, Cerulli asked 800 401(k) plan sponsors what action their company preferred plan participants who were retiring or separating from employment take. Fifty-nine percent said they preferred that retired/separated participants take their savings and leave the plan.

They could do this by either rolling over assets to an IRA or to another employer-sponsored retirement plan (if possible) or by taking a full cash distribution.

Twenty-seven percent of all respondents preferred that leavers keep assets in the company’s 401(k) plan, including 33% of large sponsors — plans with at least $250 million in assets.

Cerulli pointed out that big sponsors’ preference was meaningful because large 401(k) plans represent 64% of the $5.5 trillion total market, and their preference would have an outsize effect on whether assets of retired/separated participants stayed in the system.

It said that if a relatively small number of big plan sponsors implemented proactive campaigns to retain assets of retirees and other departing participants, total distributions could be significantly reduced and eventually reverse the market’s current negative net flows trend.

“Organic asset growth will require an outside catalyst(s) such as success in converting the largest of plans to position themselves as a final stop for retirees’ assets, and/or the passage of meaningful retirement legislation,” Sclafani said.

— Check out Inherited IRAs and the Double Tax Trap on ThinkAdvisor.


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