Data & Research September 8, 2016

Almost Half of Projected IRA Rollover Assets ‘At-Risk’ Post-DOL Conflict of Interest Rule

New research from global analytics firm Cerulli Associates suggests more assets in the retirement industry will remain in employer-sponsored DC plans following implementation of the rule.

 

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While the $7.3 trillion individual retirement account (IRA) market is the largest and fastest-growing segment of the U.S. retirement market, the Department of Labor (DOL)’s new Conflict of Interest Rule will impose greater scrutiny on the rollover market potentially disrupting future flows, Cerulli reports.

“There is general consensus in the retirement industry that more assets will remain in employer-sponsored DC plans because of the rule,” says Jessica Sclafani, associate director at Cerulli. “While Cerulli generally agrees with this statement, there are additional considerations, such as the influence of existing adviser relationships, which is the greatest driver of IRA rollover assets, in addition to DC-plan-specific considerations, such as current DC plan design and lack of in-plan retirement income solutions, that may continue to support the migration of DC plan assets to the retail IRA market.”

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Cerulli finds that 29% of respondents said they rolled over their retirement savings from an employer-sponsored account into an IRA because of advice from a financial professional. Another 29% consolidated their retirement savings into an existing IRA.

Under the final rules of the new DOL Conflict of Interest initiative, “the recommendation to roll assets from an employer-sponsored plan to an IRA is explicitly called out as a covered recommendation that would trigger fiduciary status for the financial adviser,” according to Cerulli.

The research firm calls this aspect of the new rule “one of the most significant changes the rule introduces. For financial advisers who rely on IRA business as a significant component of their book of business, it is unlikely that they will abandon IRA revenue opportunities post-implementation of the rule. Rather, Cerulli anticipates a greater bifurcation in the services that will be offered to IRA clients based on their account balances.”

So would transparencies in fees, the firm suggests. According to Cerulli’s research, 20% of respondents said they don’t pay any fees into their 401(k) retirement plans and 23% said they don’t know whether they do. As for services that participants want from their recordkeepers, Cerulli found that 53% want financial planning, 52% want information about investments, and 51% want projections of future retirement.

Still, the IRA market continues to grow. Cerulli attributes much of the IRA asset growth to Baby Boomers entering retirement. The firms says growth in traditional IRA assets is influenced heavily by rollovers, but growth in Roth IRA assets is dictated more by investor contributions and Roth conversions. Cerulli projects Roth IRA assets will grow at a double-digit yearly rate for the duration of the decade and exceed $1 trillion by 2019.

One top-10 IRA provider tells Cerulli that Roth IRA contributions were more than 2,5 times greater than contributions made to a traditional IRA in 2015. Moreover, the firm points to research by Vanguard which in April 2016 revealed that more than $2 of every $3 contributed to a Vanguard IRA went into a Roth IRA. 

Client Service September 8, 2016

Study Reveals What Makes a DB Plan a Governance Leader

Governance Leaders are focusing on pursuing new investment strategies, prioritizing risk management capabilities, hiring more risk talent and expanding internal investment capabilities, enhancing their board’s effectiveness, and improving funding levels.
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A study by State Street identified a group of “Governance Leaders” among defined benefit (DB) plan sponsors who will upgrade four or more aspects of their governance over the next year. “This group shows that a commitment to improved governance standards can have wider benefits,” State Street says.

According to the research report, leading pension funds may be able to enhance long-term outcomes for their members by upgrading their risk management capabilities and governance frameworks to support potentially value-added investment opportunities including allocations to more complex assets.

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Improving governance is clearly a top priority for all pension funds in the study. More than nine in 10 (92%) will upgrade at least one aspect of their governance approach in 2016. State Street identifies seven steps for becoming a governance leader:

  • Optimizing balance of responsibilities—board vs. management;
  • Increasing training / education opportunities;
  • Changing board member recruitment;
  • Revising incentive models;
  • Increasing transparency to members;
  • Increasing reporting frequency to board; and
  • Increasing autonomy of investment function.

Governance Leaders are focusing on pursuing new investment strategies, prioritizing risk management capabilities, hiring more risk talent and expanding internal investment capabilities, enhancing their board’s effectiveness, and improving funding levels.

Governance Leaders expect to eliminate their DB plan deficits more quickly than other pension funds in the survey—perhaps a sign of their ability and readiness to put effective measures in place. They invest in governance improvements and prioritize diverse risk management expertise across their fund. And they adapt their investment strategies to help manage any funding shortfalls and to balance assets and liabilities.

According to the survey, Governance Leaders’ governing fiduciaries have above-average general investment literacy, and better understanding of the risks facing their fund. They have strong capabilities and strategic vision compared with other respondents.

Governance Leaders are also significantly more likely to increase their exposure to alternative asset classes than other pension funds in the survey, and they show a greater appetite for environmental, social and governance (ESG) investing.

Governance Leaders give higher priority to a broad range of risks—including longevity, liquidity and investment risks—than other pension funds. This may help them to achieve stronger, more wide-ranging risk frameworks than other pension funds, State Street says.

State Street surveyed 400 senior executives in the pension fund industry in October and November 2015. The full survey report is here.

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