Average daily transfer activity for defined contribution (DC) plan participants remained unchanged in January compared with the previous month, according to the Aon Hewitt 401(k) Index.
Overall, defined contribution plan participants’ daily
transfer volume averaged 0.025% of total daily balances, the same as in December
2013. This is slightly below the 12-month daily average of 0.028%. Three days
in January had transfer activity above normal levels.
The index defines a normal level of relative transfer
activity as when the net daily movement of participants’ balances as a percent
of total 401(k) balances within the index equals between 0.3 times and 1.5
times the average daily net activity of the preceding 12 months.
Despite equity markets getting off to a rough start in 2014,
the index finds that DC plan participants continued to favor stock funds in
January. Out of the total net transfer activity of $306 million (0.19%) in
January, $212 million (0.13%) flowed into diversified equities (equity assets
excluding company stock). In addition, employee discretionary contributions to
equities, another measure of participant sentiment, increased to 65.6% in
January, up from 64.1% in December 2013.
Equity markets were down in January, with emerging
markets being the weakest link. The MSCI Emerging Markets Index returned -6.5%
for the month of January. U.S. equities also declined, as the S&P 500 Index
dropped 3.5% during the month. Non-U.S. equities declined, with the MSCI All
Country World ex-U.S. Index posting a January return of -4.5%.
In spite of these poor returns, investors continued to
transfer money into equities. International funds had the most net inflows,
with gains of $83 million (27%). Large U.S. equity funds followed, with a gain
of $59 million (19%). Mid-U.S. equity funds had $42 million (14%) of the total
monthly inflows.
The fixed-income market, as measured by the Barclays Capital
Aggregate Bond Index, rallied to start the year, gaining 1.5% as the yield on
the 10-year Treasury fell by 39 basis points. Bond funds saw moderate inflows
of $56 million (18%).
Net outflow activity in January was led by company stock
funds, with $179 million (58%); GIC/stable value funds, with $78 million (26%);
and money market funds, with $28 million (9%) transferring out.
On
average, participants’ overall equity allocation slightly decreased to 64.7% at
the end of January, down from 65.2% in December 2013.
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Nearly half of the average financial adviser’s book of business is made up of individual retirement accounts (IRAs), says investment analytics firm Cerulli Associates.
That means advisers have a key and growing role to play in
asset managers’ ability to win flows from qualified retirement accounts, says
Bing Waldert, a director at Cerulli. The firm recently published another issue
of The Cerulli Edge—U.S. Asset Management
Edition, which focuses on trends and challenges in advisers’ IRA business.
The report finds that financial advisers, on average, tend
to capture larger rollovers than direct service providers, with the largest
balances coming out of existing advisory relationships. The findings are made
more significant by the fact that IRA rollovers are receiving increased
scrutiny from various regulatory and government authorities, which could result
in changes to the way advisers are allowed to recommend related products and
services.
The Financial Industry Regulatory Authority (FINRA), for
instance, has said reexamining IRA
rollover practices will be a priority in 2014. That has led some industry
experts to go so far as recommending some providers pause
on rollovers until further guidance is issued. The Department of Labor’s
Employee Benefits Security Administration (EBSA) has also thrown its hat into
the rollover ring, warning that pending regulatory changes could add certain
IRA rollovers to the list of transactions prohibited under the Employee
Retirement Income Security Act (see “New
Restrictions Loom for IRA Rollovers”).
The Cerulli report breaks down the expected impact of
increased regulation of rollovers by firm type and finds the following:
Recordkeepers
should feel a positive impact of increased scrutiny of IRAs and related fees,
as better informed participants are more likely to stay in their existing
defined contribution (DC) arrangement—or roll to a new DC plan—to pay lower
costs and fees.
Asset managers
with retail distribution business lines should feel only a slight impact
from changing regulations, as registered representatives and advisers will
likely continue to win large rollovers as an extension of clients’ existing financial
planning services.
Asset
managers with institutional distribution can expect positive impacts from
changing fiduciary and suitability requirements, as participants will be more
likely to stay in their institutional plan for lower costs and fees.
Broker/dealers
and asset custodians could feel a slightly negative affect should new
regulations be approved this year. That’s because, while advisers will continue
to win large rollovers from existing clients, broker/dealers will likely be the
party forced to bear the brunt of greater disclosure requirements.
Direct providers are expected to feel the most pain from
stricter rules on the marketing and selling of IRA rollovers, as many direct
platforms depend on their recordkeeping business for rollovers. This may not be
all bad for direct providers, as many of the largest direct platforms are also
the largest recordkeepers (i.e., Fidelity, Vanguard and Charles Schwab), and
should therefore also benefit from more participants staying in DC plans as
opposed to establishing an IRA.
One major takeaway from what has been reported on and
speculated about regarding new rules for IRA rollovers, Cerulli says, is that
new regulations are most likely to focus on the relative costs of funds inside
DC plans versus funds offered through a retail IRA platform. In many cases, DC
plans of reasonable size can benefit from economies of scale and can access
institutionally priced mutual funds and support services—two perks lone IRAs
can’t often achieve.
As a result, Cerulli says, investors choosing to roll over their
assets may end up with higher costs in an IRA, meaning a provider might have
breached his fiduciary responsibility in recommending such a service. While
Cerulli is quick to point out that costs are not the only factor advisers must
consider in determining a client’s best interest, the increased costs of IRAs
over DC plans may make it more difficult for advisers to appropriately suggest
rollover services in a fiduciary context.
As a counter argument, Cerulli points out that many industry
executives believe that investors do not understand the fees associated with
maintaining an IRA, which may be higher than a brokerage account. According to
these observers, investors value the choice and flexibility associated with
rollover IRAs, and these attributes outweigh the potentially higher costs.
However
providers decide to address pending regulatory changes, Cerulli says strong
relationships appear to be the key to securing rollover assets, which in turn suggests
an emphasis for firms on developing service to promote good will with current
clients. And the IRA rollover market is still growing significantly, Cerulli
says, even as regulatory scrutiny and increased focus on rollovers from DC
providers will encourage more and more job changers to roll over to a new
employer's DC plan rather than an IRA.
Cerulli estimates that rollover contributions to IRAs
totaled $321 billion in 2012 and will reach $467 billion by 2018. Breaking down
those figures, Cerulli finds rollover totals from 2007 through 2012 were more
than 20 times the amount of recurring contributions.
For two of the largest providers assessed in Cerulli’s
reports, the second-largest source of IRA assets was the transfer of assets from
other IRA providers—not contributions. Another IRA provider told Cerulli that
only one of every five IRA account holders makes an annual contribution,
further highlighting the importance of rollover revenues.
Other results from the Cerulli report show that the total
amount of assets annually eligible for distribution from DC plans is more than
twice as large as the amount of assets that actually roll over ($940 billion
compared with $290 billion)—implying a substantial and lasting opportunity for
advisers and service providers once the pending regulatory changes get sorted
out.
In breaking down the assets that do make it into IRAs,
Cerulli finds that older participants, as expected, make up the majority of
those rolling assets into an IRA. In fact, rollovers from participants in their
20s, 30s and 40s together only rolled over 31.8% of those assets moved in 2012.
Despite the top-heavy nature of the market, Cerulli stresses
that the advantage of a rollover from younger age groups is the longer period
of time that assets will remain in the account before withdrawals being. Firm
will do well, then, to focus rollover efforts on all age groups to ensure
lasting and dependable revenues.
Information
on how to obtain a full copy of the report, as well as a short sample and table
of contents, is available here.