More money leaving 401(k)s than coming in
10 millennials making $50,000 a year and contributing 3 percent of salary are needed to replace one boomer making $100,000 a year.
Outflows from 401(k)s are outpacing new money coming into workplace retirement savings plans, a trend that is likely to continue as more baby boomers retire, according to new research from Cerulli Associates.
Between 2012 and 2017, outflows increased at an annual rate of 8.4 percent, compared to a 6.4 percent annual growth rate of contributions to plans.
Cerulli says two factors explain the imbalance: demographics and the maturity of the 401(k) market.
“The increasing rate of outflows can be attributed to the Baby Boomer generation,” said Jessica Sclafani, director at Cerulli, in a release. “As they enter retirement, investors are beginning to draw down a 401(k) account or are rolling the entire account balance to the retail individual retirement account (IRA) market. This demographic factor supports total distribution growth as the baby boomer cohort of 401(k) investors is more likely to have higher-balance accounts that represent many years of saving.”
Millennial 401(k) investors are replacing boomers in the workforce, but they are deferring a smaller percentage of their salaries to retirement accounts, creating what Cerulli calls a big-account-out, small-account-in dynamic.
Ten millennials making $50,000 a year and contributing 3 percent of salary are needed to replace one boomer making $100,000 a year and contributing 15 percent of salary that rolls assets out of a plan.
Moreover, the 40-year old 401(k) market has matured, with flat organic growth experienced since 2013, creating revenue pressure for retirement plan service providers.
If the trend of outflows is to be slowed, or reversed, more boomers will have to leave assets in 401(k)s when they retire.
But that would require plan sponsors to encourage assets to stay in plan and continue to assume fiduciary liability for retirees’ savings.
In recent years, some large plan sponsors have reportedly been encouraging retirees to leave assets in-plan in order to preserve 401(k) plans’ economies of scale.
Some retiree advocates argue assets are better off remaining in-plan, where savers are more likely to benefit from lower cost investments.
But a survey of 800 plan sponsors by Cerulli shows most employers prefer retiring workers roll assets out of 401(k)s. Nearly six in 10 employers said they would rather have savings rolled into an IRA outside the plan, have assets rolled into another employer plan, or have a lump sum issued.
Only 27 percent of sponsors said they prefer having retiree assets stay in-plan. Large sponsors—those with more than $250 million in retirement plans—were slightly more likely to prefer assets to stay in-plan, at 33 percent.
For recordkeepers and money managers that are seeing revenue compression from assets leaving 401(k)s, incentivizing large sponsors to encourage retiring employees to leave assets in plan is one potential way to stem the hemorrhaging, Cerulli says. Assets in large plans account for 64 percent, or almost $3.5 trillion of the $5.5 trillion 401(k) market.
“The preference of these plans will have an outsized impact on whether assets of retired participants stay in the 401(k) system,” Cerulli’s report says. “If a relatively small number of large 401(k) sponsors implement proactive campaigns to retain the assets of retired participants, total distributions could be significantly lessened, and eventually derail the 401(k) market from its current track of negative net flows.”
401(k) loss is IRAs’ gain
Between 2012 and 2017, surging equity markets and boomers’ rollovers from 401(k)s swelled traditional IRA accounts.
Traditional IRAs increased $2.9 trillion in value in that time, with 20 percent of that growth attributable to net inflows, or organic growth.
The overwhelming amount of that flow—95.6 percent–came from 401(k) rollovers. Between 2012 and 2017, $1.95 trillion in 401(k) assets were rolled over to traditional IRAs. According to the Investment Company Institute, 67 percent of the assets in the $7.85 trillion traditional IRA market are held by investors age 60 or older.
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