By Cyril Tuohy
Financial advisors appear to be taking in stride the news that 401(k) defined contribution plans will experience “massive outflows” beginning sometime next year as aging baby boomers start to draw on their nest eggs and required minimum distributions kick in.
With the first of the baby boomers turning 65 in 2011, those same boomers at the leading edge of a generation 78-million strong will be turning 70 next year. Required minimum distributions come out when the 401(k) owner reaches the age of 70½.
And what if outflows — “massive outflows” — as one headline described it, from 401(k) funds surpass in-flows, so what? Is it an issue?
It could become an issue but the question is for whom, said wealth manager Assaf M. Pinchas, a wealth manager with Allegiance Financial Group in Vienna, Va.
Outflows from one retirement provider could mean fewer assets under management. This means that there are fewer assets from which the provider can spread costs and fees, Pinchas said in an interview with InsuranceNewsNet.
Already a low-margin business, greater distributions out of 401(k) plans will put more pressure on plan providers to grow and attract younger investors.
“As you see distributions continue to rise and you see boomers retire, the question will be: Does the industry as a whole do a good enough job of attracting money from the young into 401(k)s?” Pinchas said.
Cerulli Associates reported earlier this year that while the growth expectations for the defined contribution market remain strong, 401(k) providers should “adjust their strategies to reflect distributions beginning to outpace contributions.”
It’s not clear exactly when the tipping point will occur, although some media outlets, citing the Cerulli report, peg the date at 2016.
Some plan providers will be faced with a shrinking asset base as distributions take their toll. However, for workers and managers — plan participants — distributions reaching a tipping point where they outpace contributions is a “nonissue,” said Charles Sachs, principal with the registered investment advisor (RIA) Private Wealth Counsel in Miami.
“This is not one pool like Social Security, but investments spread across tens of thousands of providers and investments,” he said. “I don’t see any reason why those with money invested in a 401(k) have anything to be concerned with.”
Allan Katz, president of Comprehensive Wealth Management Group in Staten Island, N.Y., said 401(k) outflows may cause extra selling of some securities, but that there’s little cause for concern.
“I don't think anyone saving for retirement should really concern themselves with this fact,” he said in an email response to a query posted through the Financial Planning Association. “They need to create and stick to a plan to achieve their own financial goals.”
Data released by the Investment Company Institute (ICI) indicate that since 1984, when the organization began tracking 401(k) contributions, only in the year 2000 has the 401(k) industry experienced net outflows.
That year, 401(k)s took in $169.2 billion and paid out $172.2 billion.
In 2012, the most recent year for which ICI data were available, 401(k) plans took in $305.4 billion and disbursed $284.2 billion, for a net gain of $21.2 billion. This was down from a net gain of $32.8 billion in 2011. By contrast, defined benefit plans have experienced outflows every year since 1985.
Outflows surpassing in-flows in any given year may not even affect the trillion-dollar asset pool held in 401(k) if markets perform well and the overall size of the 401(k) market continues to grow.
At the end of the third quarter of last year 401(k) plans held $4.5 trillion in assets and other defined contribution plans held $2.2 trillion. In all, defined contribution plans held 27 percent of all U.S. retirement assets, ICI data show.
Even if the outflows that surpass in-flows hardly dent the 401(k) market, Sachs said any sudden outflows from individual 401(k) retirement plans may signal issues with a plan provider; dissatisfaction with high fees, for example.
Defined contribution plan experts caution against reading too much into asset flows into and out of the defined contribution plan market from one year to the next as there is already significant variation from year to year in the 401(k) segment.
Net contributions to 401(k) reached $45.3 billion in 2003, fell to $11.1 billion in 2007, then rose $49.6 billion in 2009, ICI data show.
401(k)s would have to rack up several years of outflows before economic experts would consider the movement a real trend.
Keeping an eye on outflows is important, though, because outflows offer a big opportunity for retail advisors as plan participants consider whether to keep their funds in a 401(k, roll them over into IRAs or cash out once and for all.
With 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 move,” said Kristi C. Sullivan, owner of Sullivan Financial Planning, a Denver-based fee-only RIA.
Pinchas, a fee-based and commission-based advisor, said it’s normal that as boomers age, the industry can expect an increase in 401(k) distributions. Should those distributions outpace contributions eventually, there’s little cause for concern.
But an increase in premature distributions from 401(k) would be bad news. “Increases in premature distributions – that’s a concern,” he 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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