A new report from Cerulli, “The Cerulli Report—U.S. Retirement Markets 2018: Creating Opportunity Amidst New Outflows,” takes a look at current dynamics in various types of retirement plans. Between 2012 and 2017, distributions and outflows from 401(k)s expanded at a five-year compound annual growth rate (CAGR) of 8.4%, but contributions or inflows to the 401(k) market expanded at only a five-year CAGR of 6.4%.
“The consequence is that the 401(k) industry finds itself in a period of negative net flows,” Jessica Scalfani, a director with Cerulli, tells PLANADVISER. “If we want to see continued asset growth, we are wholly reliant on market returns for asset growth.”
However, there are steps that retirement plan advisers can take to retain the assets of retiring participants, she says. “In the adviser-sold DC [defined contribution] market, the adviser sees it as an opportunity to garner IRA [individual retirement account] rollovers,” Sclafani says. “Sometimes this can be appropriate, especially if the plan is limited in investment options for retirees.” On the other hand, “if rollovers are not an important factor for advisers, they may feel strongly that participants would benefit from staying in the plan, where they can access investments that are institutionally priced and monitored by a fiduciary.”
There are benefits for plan sponsors, as well, for keeping assets in the plan, she says, namely having the scale to negotiate fees with providers and asset managers. Additionally, the sponsor may be paternalistic and think keeping retired participants in the plan is the right thing to do. However, the Cerulli report indicates that only 27% of plan sponsors prefer that retirees keep their assets in their plan, and while this is more likely among large plans, it is only marginally so; only 33% of plan sponsors whose plans have $250 million or more of assets prefer that retirees keep their assets in the plan.
Should the government pass legislation permitting open multiple employer plans (MEPs), the Cerulli report says that this could be as asset-gathering opportunity for advisers and asset managers. “Open MEPs would create efficiencies for advisers because there would be one plan design for all clients that go into the open MEP,” Scalfani says. Additionally, they would make it cost efficient for advisers to go further down market to micro plans, she says.
In the 403(b) market, recordkeepers see the greatest opportunity for growth—an increase in assets under administration (AUA) of 5% or greater—among health care companies, the Cerulli report shows. “This is because there has been consolidation among health care companies following the passage of the Affordable Care Act,” Sclafani says. “When you look across the various sectors within the 403(b) market, it is very differentiated across each segment. Health care tends to be more akin the the 401(k) market in terms of plan design. Oftentimes, the 403(b) plan is the primary retirement savings vehicle, whereas among higher education, the 403(b) is only a component of a package.”
Forty-two percent of the recordkeepers that Cerulli surveyed for its report expect positive AUA growth in the K-12 public school sector. However, Scalfani says this is likely to be among providers that have been in this market for many years. “This sector of the 403(b) market is very unique,” she says, “and as a recordkeeper, you have to have a legacy of participating in that sector. These plans are sold very differently than health care. They are served by multiple venders, are adviser-sold and are dominated by insurance companies.”
Among defined benefit (DB) plans, the Cerulli report says chief investment officers “maintain that their companies cannot accept the kind of funded status volatility experienced in 2007 and 2008 during the global financial crisis, when funding ratios appeared to decline seemingly overnight. As such, Cerulli believes corporate DB derisking will continue for the foreseeable future, which will benefit those institutional asset managers and investment consultants already advising on LDI [liability-driven investing] and derisking glidepaths.”
The Cerulli report also notes that between 2012 and 2017, assets in IRAs increased by nearly $2.9 trillion, with rollovers accounting for 95.6% of inflows. Investor contributions only accounted for 4.4%.
As for financial wellness programs, while plan sponsors may try to assess the return on investment from these programs, they should also “have goals such as ‘improve workplace morale’ and ‘retain top employees’ that are functions of employee attitudes and behaviors,” the Cerulli report says.
Scalfani adds that advisers overseeing financial wellness programs being offered by multiple providers, such as a recordkeeper, third-party financial wellness provider and managed account provider, need to take a look at the methodologies each source is using. Otherwise, she says, “there is potential for mixed messaging.”