Exactly when 401(k) defined contribution plan outflows surpassed in-flows appears to be a matter of some debate.
But what is beyond dispute is that over the next decade or so, 401(k) defined contribution plan outflows will surpass in-flows. This will happen as the baby boomers draw upon their retirement savings and millions reach 70 ½, the age trigger for required minimum distributions.
Call it the end of the great bull run for defined contribution in-flows, but what does that mean for advisors who work with 401(k) and other defined contribution plans?
For the last 20 years, they were in the right place at the right time. Indeed, some advisors may not even have had to lift much more than a finger to take credit for gobs of retirement dollars pouring into retirement plans they advised.
Those days are coming to an end, if they haven’t ended already. So it’s worth asking whether the defined contribution plan market, already a relatively low-margin business, is still attractive for advisors as withdrawals accelerate and huge mutual fund complexes cut fees still further.
Are plan advisors still in the right place, even if they are no longer quite at the right time?
As is often the case with market movements, bullish and bearish sentiments seem to coexist.
Some advisors suggest that the defined contribution marketplace is no longer the fat, lucrative place it used to be as retirement plans head for consolidation and commissions drop.
“The defined contribution market will not roar ahead in the future because those baby boomers will start taking out the bigger rollovers on the back end,” Chip Roame, managing director with Tiburon Advisors in Tiburon, Calif., told clients in a recent webinar.
Members of Generations X and Y will be investing in defined contribution plans.
However, Roame said, both generational groups will be investing much smaller amounts and rollovers will continue to pop out of the defined contribution market.
Other advisors seem to think the nation’s trillion-dollar defined contribution market still has much to offer advisors. Even in an era of declining flows, advisors have a role to play in helping retirement plans tweak product platforms to fit the needs of a new generation.
With an estimated $6.5 trillion sloshing around 401(k) and other defined contribution retirement plans at the end of the third quarter last year, according to the Investment Company Institute, that’s still “beaucoup bucks.”
Tipping Point a Nonissue
Reaching the contribution-distribution tipping point is a nonissue for plan participants, although it may mean a shrinking asset base for the plans themselves. That’s the word from Charles Sachs, principal with Private Wealth Counsel, a registered investment advisor (RIA) based in Miami.
“This is not one pool like Social Security, but investments spread across tens of thousands of providers and investments,” Sachs told InsuranceNewsNet. “I don’t see any reason why those with money invested in a 401(k) have anything to be concerned with.”
With the leading edge of the baby boomers approaching the age at which their required minimum distributions kick in, “money is going to move and it’s just a matter of capturing it while it’s on the move,” said Kristi C. Sullivan, owner of Sullivan Financial Planning, a Denver-based fee-only RIA.
When, where and how money moves will offer new opportunities for advisors, even if the year outflows surpass in-flows seems up for discussion.
The Wall Street Journal, using data from BrightScope in an article published last year, had investors pulling a net $11.4 billion from tax deferred savings plans back in 2013. Severity of the outflows is estimated to peak as high as $40 billion with outflows lasting until 2030, according to The Wall Street Journal, citing an analysis from J.P. Morgan.
Other analysts have pegged 2016 as the outflow inflection point.
In addition to $6.5 trillion in defined contribution plans, individual retirement accounts held another $7.3 trillion at the end of the third quarter, ICI data show. Some funds leaving the 401(k) market are moving to the IRA market.
Over the next 20 years, as much as $21 trillion in retirement plan assets will be “on the move,” leaving retirement plans and migrating into investable assets, Roame estimated.
That massive transition should be present new opportunities for advisors looking to jump ship out of retirement plans and into managing investable assets.
The key is for advisors to stick with baby boomers for a bit longer, even if boomers gradually lose their dominant position as the generational locomotive behind defined contribution retirement plan in-flows, Roame said.
Baby boomers are the ones who dominate the money flow in America today.
“They dominate the credit, the dominate the insurance, they dominate the investable assets, they dominate the bank accounts,” Roame said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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