DC Assets Surpass $10T Mark in 2007

Mostly due to gains in the financial markets, total retirement plan assets reached $15.6 trillion in 2007 - an increase of almost 9% over 2006 – according to the 2008 SPARK Marketplace Update.

The Society of Professional Asset-Managers and Record Keepers (SPARK) data showed defined contribution assets surpassed the $10 trillion mark in 2007, an increase of 8.7% over 2006. Employer-based DC plan assets grew 9%, while assets in IRAs increased more than 10%.

Even defined benefit plan assets rose by 8.4% as a result of increased funding levels and positive investment returns, SPARK said.

Assets in employer-based DC plans reached nearly $5 trillion at year-end 2007, and represent 50% of the overall DC market. Private sector plans, at nearly $4.3 trillion, make up 86% of all employer-based DC assets, while total assets in public sector employer plans increased almost 10% over 2006, reaching $670 billion.

The majority of the private sector assets ($2.9 trillion, or 66%) are in 401(k) plans, which grew by 12% compared to a year ago, SPARK said. Individual retirement plan assets equaled $5.2 trillion at year-end; most in IRAs ($4.3 trillion). IRA growth primarily reflects increasing distributions out of the employer-based system into rollovers, which were $2.7 trillion or 57% of all IRA assets at year-end 2007, according to SPARK.

The allocation of assets in 401(k) plans remained relatively stable over the past year, with expected increases in balanced and lifecycle funds and international equity investments. This was the result of increasing adoption and interest in target-date funds and above average performance among international equities, respectively, SPARK said. The Institute anticipates continued growth in these categories of investments due to Department of Labor (DoL) guidance on Qualified Default Investment Alternatives (QDIA).

The estimated market share of 401(k) assets is held primarily by mutual fund companies, followed by insurance companies and banks. The estimated market share of 401(k) plan administration is served primarily by third party administration firms, followed by mutual fund companies and insurance companies.

Looking Ahead

SPARK anticipates that gradual implementation of many of the auto plan features incorporated in the Pension Protection Act will result in an increase in participation rates and deferrals over the next few years – helping to offset the steady rise in distributions driven by the aging workforce. Contributions from the added participants and the auto deferral increase provisions could help increase the net growth rate of DC plan assets by 25 to 35 basis points annually, SPARK said.

On the legislative front, the Institute noted that the DoL and the Congress will continue to address the issues surrounding fee disclosure, and both the DOL and the IRS will finish implementing the PPA’s automatic enrollment provisions. Additionally, some issues regarding QDIAs remain unclear and a FAQ addressing issues relating to the notice requirement and other issues is reportedly imminent, SPARK said.

The Institute anticipates that the FAQ will address, among other issues, how the timing of the initial notice impacts the fiduciary relief provided under the statute and will give more information about what must be included in the notice. There may also be some guidance on how to integrate a QDIA notice with the notice required for automatic contribution arrangements as well as clarification of the meaning of “fixed income” as used in the regulation.

SPARK also pointed out that sweeping new regulations for the 403(b) market will put it at center stage for much of 2008 as plan sponsors and providers invest a great deal of time preparing for implementation by the January 1, 2009, effective date. The report said the 403(b) market comprises approximately 34,000 plans, 6 million active participants, and $725 billion in assets.

Most of the 403(b) participants and assets are concentrated among larger plans – 2,200 plans with more than 500 participants comprise two-thirds of the assets. The market is dominated by educational institutions, which make up 83% of the total market. Higher education institutions account for over 50% of 403(b) plans.

The Institute anticipates the IRS will continue to bring 403(b) plans closer in similarity to 401(k) plans by developing a determination letter program.

More about the SPARK Institute can be found at www.sparkinstitute.org.