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.