A battle line is being drawn over managing the roughly $26 trillion in defined contribution plans, according to experts at researcher and consultancy Cerulli Associates.
On one side are asset managers benefitting from generally wealthier retirees rolling out of workplace retirement plans like 401(k)s into individual retirement accounts, sometimes with retirement income annuity riders. On the other are those wealth managers and annuity providers seeking to keep savers in-plan to service their decumulation needs throughout retirement.
At the moment, those serving rollovers are well in the lead, according to Shawn O’Brien, an associate director of retirement at Cerulli Associates. “We’ve seen the IRA market capture an increasing share of net outflows,” he said on a Tuesday webinar with clients. “IRA rollovers are a really significant driver of growth [of 401(k) outflows].”
According to Cerulli data, IRAs make up the largest amount of the U.S. retirement market (38%), followed by corporate DC plans (26%), government DC plans (8%) corporate DB plans (10%) and public DB plans (18%).
Plan sponsors hope to add the much more complicated—and largely untested—option of serving the retirement decumulation needs of savers within plans. Although most plan sponsors would prefer to keep savers in-plan, according to Cerulli research, a host of issues ranging from recordkeeper implementation to litigation concerns are hampering their ability to offer in-plan retirement income options. What’s more, the savers who would use such services are likely in the lower tier of affluence, with total savings of $2 million or less.
Even so, there are many industry players incentivized to serve the vast market of lower-net-worth savers who would potentially use an in-plan option, O’Brien said.
“You have a number of players that are wealth management interested in capturing rollovers, and others who have a clear vested interest in offering in-plan annuities,” O’Brien said. “It’s interesting to see those competing priorities play out in the marketplace.”
Catch The Outflow
In the past, when defined benefit plans were more common in the corporate sector, outflows were not as much of a focus. Now, as defined contribution plans have come to dominate corporate retirement savings, there is more money leaving 401(k) plans than entering, according to Cerulli data.
That shift first began in 2018, when $472 billion left 401(k) plans, as compared with $461 billion coming in. In 2021, the most recent data available, $636 billion left plans, as compared with $540 billion coming in.
At the moment, there are advantages to retirees who roll out of a plan, O’Brien said. Those range from being able to choose from a wider range of investment options to not being subject to Employee Retirement Income Security Act regulations that govern defined contribution plans. Wealthy savers, in particular, are often attracted to these advantages and can afford personalized wealth management.
On the other hand, remaining in-plan during retirement has other advantages, he said. Those includes, primarily, the availability of lower-investment-fee options, such as collective investment trusts, due to the larger pool of assets. This is a draw, in particular, for savers with less wealth, because fees will take a bigger chunk out of their retirement income, O’Brien said.
Participants who stay in-plan may also have access to lower-cost hybrid or digital advice that has become more common in workplace retirement plans, O’Brien said, as well as the advantages one gains from being covered by ERISA regulations and safety measures.
The Bigger They Are
In the end, in-plan retirement income options may make the most sense for lower-wealth participants, according to Cerulli.
In-plan services make the most sense “as we move down the chain to those with less money,” Jared Baucom, Cerulli’s managing director of global sales and marketing, said on the webinar. “This lower tier is highly populated, tend[s] to work for large companies and [is] at places that have a DB legacy, shifting to DC.”
These savers staying in-plan do not serve as a “threat” to full-service wealth managers, at least as they serve clients now, Baucom said.
Meanwhile, larger plan sponsors are usually more likely to push for innovation in their retirement plans, such as embedding retirement income options, according to the speakers.
In recent research, O’Brien found that the plan sponsors actively seeking to retain retiree assets were those working with institutional investment consultants or large aggregator firms.
“We have the data to support that this is a large and mega-market trend,” he said.
Even so, the move to in-plan decumulation with elements that go beyond non-guaranteed withdrawal schedules is still six or seven years away from prevalence, O’Brien said.
The biggest obstacles to adopting in-plan retirement income, according to Cerulli’s presentation, are: litigation concerns, recordkeeper integration, and plan sponsor education/interest.
It will also likely involve an incremental approach, O’Brien said, with plan sponsors offering a TDF with periodic withdrawals in the qualified deferred investment alternative. That type of offering does not require a large plan design or coordination with a recordkeeper to offer the option.
“We know that when innovation does take place in the DC market, it unfolds in a very gradual place, and it tends to start in the largest ends of the market—when you have certain plan committees and heads of benefits that are trying to drive their overall benefits for employees,” he said.