Regs Could Impact Rollovers from Retirement Plans

The financial crisis first sparked regulatory scrutiny and an examination of rules surrounding the sale of financial products to consumers, notes the April issue of The Cerulli Edge – U.S. Edition. The examination was mainly designed to protect retail investors and prevent shocks to the economy, says Bing Waldert, director at Cerulli. However, he says, “it also has the potential to impact the asset management industry, both in intended and unintended ways.”

Waldert describes the onset of Baby Boomer retirement—which began in 2011 as the first of that generation turned 65—as a retirement test case, unique in that it is the first generation to bear some of the responsibility for its own retirement. “This generation finds itself on the cutting edge of transition from defined benefit (DB) to defined contribution (DC) plans as the primary retirement savings mechanism,” he points out. However, only about one-quarter of investors between the ages of 55 and 70 have a retirement income plan and a specific retirement date, according to Cerulli’s data.

In addition, the current generation nearing retirement can expect to receive Social Security, and some have access to DB plans. But the generations behind the Boomers will not find these two pillars of guaranteed retirement income as solid, and these investors may need to accept full responsibility for funding their retirement.

These factors are now causing policymakers to legislate changes intended to close some of the gaps to help vulnerable and unsophisticated investors plan their retirement, Cerulli says in its report. In many cases, the proposed solutions encourage plan participants to leave assets in an employer-sponsored plan instead of rolling them over into an IRA when they leave their employer.

“Given the dependence of the wealth and asset management industries on rollovers as a source of assets and revenues, these legislative changes present a secular risk,” Waldert says. “IRAs account for 44% of an adviser’s book of business, the largest of any component.”

Existing relationships are likelier to win rollovers, the report says, and the balances tend to be bigger. A chart in the report outlines the types of relationship, share of assets, share of rollovers and average balance size. On average, rollovers to advisers ($128,700) were more than twice the size of rollovers to direct providers ($56,300).

The April 2015 Cerulli Edge – U.S. Edition also notes:

• New advisers entering the wealth management industry will find an additional challenge from the legislative push to keep retirement assets in the employer-sponsored system.
• Rollovers rose to a new level of prominence in February, when President Obama took on conflicts of interest and sales inducements when assets leave DC plans.

Cerulli Associates, in Boston, is a global analytics firm that provides financial institutions with guidance in strategic positioning and new business development.

More information about The Cerulli Edge – U.S. Edition, April 2015 Issue, including how to purchase, is on Cerulli’s website.