Industry Should Focus on Preserving Retirement Assets

Cash-outs and loan defaults were responsible for $81 billion in lost retirement assets in 2014, according to a report from Cerulli Associates, “Evolution of the Retirement Investor 2015: Insights into Investor Segmentation and the Retirement Income Landscape.”

With better, retirement-related options available for participants who take these actions, recordkeepers should continue focusing on limiting these outflows, Cerulli says.

“Part of the problem is that outside of the interaction with their recordkeeper or IRA service provider, there is really nothing stopping anyone from accessing either [their defined contribution] or IRA account early,” explains Shaan Duggal, research analyst at Cerulli. “Nearly every Gen-Xer who completed a cash distribution from their 401(k) ended up paying an additional 10% penalty on top of regular taxes to the IRS. When a distribution is requested, recordkeepers should spring into action, conveying the benefits of preserving the tax-deferred nature of the assets.”

He also notes that when participant loans are defaulted, immediately they cause a taxed and penalized event for the already cash-strapped individual. “Removing the entire loan function from the plan may be extreme, but restricting the amount of outstanding loans to only one will slowly do away with the idea that the DC plan is meant to be a source of short-term liquidity.”

The report says participants older than age 50 represented almost 80% of assets that rolled over in 2014, reaffirming the importance of winning assets from these investors.

The Cerulli report contends that the current retirement income marketplace consists of fragmented solutions. Therefore, firms should understand that income replacement is a process and that a singular product should work alongside other products and solutions to create the best outcome.

Flexibility is important for retirement income solutions. At both the retirement plan level and the product level, providing flexibility allows investors to better deal with unexpected expenses that may arise as they get older.

Distributions outpaced contributions in 2014, representing a significant turning point in the 401(k) world. Although projected assets are anticipated to grow due to market performance, recordkeepers and advisers will need to generate more out of younger employees to combat these outflows.

Savers are still interested in overall performance metrics and account balances, significantly more so than any projections of retirement income. Until this mindset changes, many participants will continue to mismanage their defined contribution (DC) accounts, Cerulli says.

Participants are looking for help with a broad slate of retirement-related subjects. Communications and services available covering these topics of interest may garner increased responsiveness from savers.

Individual retirement account (IRA) assets are expected to approach $12 trillion by the end of the decade. Rollovers will be a major source of growth, but asset managers and brokerage firms should be wary of the evolving regulatory landscape.

Advisers received the majority of rollover assets ($220 billion) in 2014, followed closely by self-directed IRAs at $162 billion. Plan-to-plan rollovers were a distant third at $27 billion. The latest proposed fiduciary rule, Cerulli says, may start to quell long-term outflows, especially since the Department of Labor (DOL) viewpoint is that the DC plan is often the best place to leave assets. However, until in-plan options become more widespread, retiring participants will still opt to roll over their accounts to an IRA, Cerulli predicts.

According to the report, Social Security is still the No. 1 source of retirement income (33.9%) for retirement Income Opportunity (RIO) participants. DC and personal savings combined provide 32.5% of participants’ income in retirement.