Data & Research July 3, 2024

Don’t Overlook the Silent-to-Gen X Generational Wealth Transfer

Hearts & Wallets’ findings counter the idea that the Baby Boomer-to-Millennial wealth transfer should be advisers’ focus.

Reported by

In contrast to the common focus on inheritances by Millennials from Baby Boomers, most wealth transfers over the next 10 years will go to Generation X from the Silent Generation, according to research firm Hearts & Wallets’ “Portrait of U.S. Household Wealth 2024.”

Hearts & Wallets’ report, released Wednesday, noted that the largest cohort of households (26.3 million homes) is homes with inhabitants younger than 35 years old and with a combined $2.2 trillion investable assets. That is actually a relatively small amount of assets when compared with the Silent Generation (those born from 1928 through 1945), made up of 10.5 million households and holding $11.2 trillion in assets. Hearts & Wallets predicted the Silent Generation will see a decline of 7.4 million households to 3.1 million over the next decade.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

“People are living longer,” says Laura Varas, CEO and founder of Hearts & Wallets. That means “the Silent Generation will be dying off over the next decade, especially in the next five years, more than Boomers.”

That will likely mean a shift of assets to families in the Generation X age range of about 43 through 58 as of 2023, whose ages will from 53 through 68 in 2033. The Silent Generation, as identified by Hearts & Wallets, are age 78 through 95 in 2023 and will be 88 through 105 in 2033. Varas suggests advisers recognize these two generations will be most active in terms of upcoming wealth transfers.

“Encourage conversations,” Vargas says to advisers working with both young and older clients. “Be supportive of the younger generation who are dealing with more trusts, often smaller ones, including inherited [individual retirement accounts]. Accounts registered to trusts are becoming more common, up to at least one in four households. Incidence is consistent across investable asset ranges.”

Varas also recommends retaining assets with programs for beneficiaries. Engagement can begin while donors are still alive. Beneficiaries, especially executors, may need more intensive support from the advisers as assets change hands and may need advice that reflects their new reality.

Navigating Wealth Transfer

The Baby Boomer shift will be massive when it comes. But Baby Boomers, those aged 65 through 74 in 2023, currently represent the next wave of wealth transfers, according to the researchers, not the present one.

“Baby Boomers are the larger numbers in terms of wealth and households,” Varas says. “Ages 65 to 74 currently control $22.4 trillion, more than any other age range.”

When it comes to population, the 21.2 million households aged 65 through 74 are up from 13.5 million in 2011. Households aged 65 through 74 have expanded faster than any other group, compounding at nearly 4% per year over 12 years, according to Varas.

As older clients discuss wealth transfers, they often ask about setting up trusts for their beneficiaries, says Amy Barber, a senior financial adviser at Multnomah Group.

As an adviser, Barber takes this opportunity to educate clients about the impact direct gifting can have on the financial literacy of younger generations. She says gifting strategies can not only accomplish the clients’ goals but can also help the next generation learn to become financially responsible investors.

“We often work with clients to make gifts and then begin to work on planning and investment strategies directly with those beneficiaries,” she says.

Advisers Step In

Based on Heart & Wallets’ study, customers reported getting both advice and service in only 45% of the relationships they have with their financial institutions, which included banks, brokerage and retirement firms with which they have accounts.

Hearts & Wallets’ Varas says if customers reported getting just one type of either advice or service, but not a second, they are most likely to report use of self-service tools (17%), which they do not consider advice.

Meanwhile, customers with one primary financial institution that meets all their needs are more likely to use it for advice and service. Therefore, Varas encourages firms to strive to be the primary provider,  often connected with being the main source of retirement advice. Being the primary relationship can be a challenge today, she acknowledges, as customers, especially wealthier ones, continue to increase the number of firms they use for their variety of needs.

“Weigh the benefits and costs of delivery to expand capabilities for households who want more help but do not qualify on assets,” Varas says. “That might be by improving capabilities to balance multiple goals or other options that provide higher-touch [services].”

The report from Hearts & Wallets was fielded from September 11 through October 6, 2023, drawing responses from 5,846 U.S. households.

Data & Research July 3, 2024

M&A Shows Up As Top Driver of Recordkeeper Swaps in New Study

Poor service quality was another driver of recordkeeper moves, new research from Escalent finds.

Reported by

Rampant mergers and acquisitions activity is not just taking place in the retirement plan advisement and wealth management sector: in fact, M&A among plan sponsors is cited as a top catalyst for them changing recordkeepers, according to a Cogent Syndicated report from Escalent.

When asked why they decided to switch plan providers, 22% of plan sponsors who made a change in the past two years cited a merger or their acquisition by another firm.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The Impact of M&A

“As a company is doing better and [is] able to hire more employees, it’s a good time to reassess [whether a plan] is offering the best services for [their] participants,” says Sonia Davis, senior product director at Escalent and the author of the “2024 Retirement Planscape” report.

Davis explains that when two companies merge, the plan population will become more diverse, as participants could be working in different industries and regions. As a result, she says, participants will have different servicing needs and some might want access to more sophisticated investment options than others. It is important for recordkeepers and providers to have solutions that cater to the needs of everyone in the plan, Davis says.

Switching providers requires significant administrative work, especially when transferring new employees onto a different platform, but Davis says a merger or acquisition provides a good opportunity for plan sponsors to reevaluate the services they need.

Overall service quality was the No. 1 reason plan sponsors changed providers, and many also cited plan investment fees, participant engagement and administrative fees as reasons for their change. Lack of accountability when resolving an issue and quality of investment options serve as secondary triggers, according to the report.

In its online survey of 1,391 401(k) plan sponsors, Escalent analyzed micro (managing less than $5 million in assets), small-mid ($5 million to less than $100 million) and large-mega (at least $100 million in assets) plans between February 14 and March 12.

Escalent found that average recordkeeper tenure in the 2024 report was 7.5 years among large-mega plans, down from 8.4 years in 2022. Among plan sponsors who issued RFPs in the last year, 19% of large-mega plans anticipate changing providers. Davis says this suggests that challenger firms are starting to have greater success attracting new business from incumbents in the large plan size cohort.

Davis stresses that more than 30% of these provider-plan relationships have been in place for 10 years or more, but it is notable that more opportunities are opening up for new providers with large and mega plans, because historically this has not happened often.

Large-mega plans reported the highest likelihood of switching plan providers, with more than one in five saying they are likely to swap out their respective recordkeepers. The Escalent report noted that actual switching rates are typically lower than stated intent, as incumbent providers are often successful in retaining current plans once they go out to bid.

The 2024 PLANSPONSOR Recordkeeping Survey also found that a majority (61%) of plan sponsors maintain relationships of more than eight years with their recordkeepers.

Meanwhile, nearly six in 10 micro plans said they are “not at all likely” to make a switch, acknowledging how tough it can be to convert existing recordkeeping business, even among plans with fewer assets.

Jim Sampson, director of retirement advisory services at Hilb Group Retirement Services, says he has serviced a lot of plans going through M&A, either folding clients into an existing plan or dissolving a plan.

He notes a few current projects in which companies are merging participants into one plan or consolidating down to two. Some of his clients, he says, are private equity-owned, and the deal market in PE is contributing to plan changes and new design needs.

“I’ve seen more M&A over the past five to six years than I have in my career, and it’s not even close,” Sampson says. “It’s a lot of moving parts, but it’s fun, because it’s different.” 

Cybersecurity a Top Concern for Plan Sponsors

Another key finding from Escalent’s report was that the threat of a cybersecurity incident or data breach has risen to the top of 401(k) plan sponsors’ concerns across all plan-size cohorts.  

For the first time in the history of the study, cybersecurity issues eclipsed fears surrounding underperformance of plan investment options. In fact, the share of plan sponsors citing cybersecurity concerns among their top three overall fears is up substantially, expanding to 47% from 40% in 2022, according to Escalent.

Two significant data breaches have occurred in the last few months, exposing plan participant personal information. More than 451,000 plan participants at J.P. Morgan Chase were impacted by a data breach in April, and 1,883 employees who participate in the Walmart 401(k) Retirement Plan and use recordkeeper Merrill Lynch had their personal data exposed in May.

Davis says there is likely a correlation between the number of breaches and the fear plan sponsors are expressing. She adds that plan sponsors put a strong emphasis on data security and cyber-risk management practices when looking to hire a new plan provider or recordkeeper.

“For recordkeepers, they have the opportunity to be very explicit and talk about what they’re doing to ensure security is there for participants, because it could be a real headache for all parties involved,” Davis says.

«