Heightened Scrutiny Won’t Slow IRA Rollovers

Total individual retirement account (IRA) assets are expected to reach $11.7 trillion by 2020, according to a report from Cerulli Associates, despite the prospect for heightened scrutiny from multiple regulators.

Shaan Duggal, research analyst with Cerulli, says the firm expects the pace of IRA asset growth to remain steady through the end of the decade. “Even with heightened FINRA rollover scrutiny, individuals, especially Baby Boomers, will continue to roll over their defined contribution (DC) assets,” Duggal notes.

Cerulli says there may also be pressure applied to rollover providers coming out of fiduciary rulemaking efforts at the Department of Labor (DOL) and the Securities and Exchange Commission (SEC). Along with FINRA, the regulators are concerned about potential conflicts of interest impacting service providers in the IRA market.

Duggal notes that an important question will be how ongoing rulemaking impacts account consolidation decisions. Many of the Baby Boomers hitting retirement have multiple DC accounts, and are facing the challenging prospect of building a sustainable retirement income stream. Cerulli recommends plan advisers and recordkeepers use “the many DC participant data points they have on file” to send targeted communications to build stronger relationships with participants. This will lead to more knowledge and confidence in the IRA rollover and/or account consolidation process.

“Creating a positive relationship early and building on it as the individual progresses towards retirement is the ideal situation for many providers,” Duggal continues. “Personalized communication during opportune life moments will help ensure customer loyalty when an individual eventually decides to roll over their account.”

This approach could become even more important in the years ahead should fiduciary rules be strengthened to include more types of rollover and investment recommendations. Especially with the DOL’s fiduciary reform, many anticipate providers will be less able to offer non-fiduciary guidance to participants contemplating a rollover.

 NEXT: Leakage and rollovers

Cerulli finds a greater number of Millennials are contributing to Roth 401(k)s, “which will become a sizable rollover opportunity in time.”

At the same time, cash-outs and loan defaults were responsible for $81 billion in lost retirement assets in 2014. “With better, retirement-related options available for participants who take these actions, recordkeepers should continue focusing on limiting these outflows,” Cerulli urges. “Participants over age 50 represented almost 80% of assets that rolled over in 2014, reaffirming the importance of winning assets from these investors.”

Like other research groups, Cerulli finds interest is building around the idea of auto-portability.

“The current retirement income marketplace consists of fragmented solutions,” the report explains. “Therefore, firms should understand that income replacement is a process and that a singular product should work alongside other products and solutions to create the best outcome.”

Not surprisingly, Cerulli says flexibility is important for retirement income solutions.

“At both the retirement plan level and the product level, providing flexibility allows investors to better deal with unexpected expenses that may arise as they get older,” the report finds.

Another hurdle to greater rollover activity is that savers are still interested in overall performance metrics and account balances, Cerulli says, “significantly more so than any projections of retirement income.”

“Until this mindset changes, many participants will continue to mismanage their defined contribution accounts,” the report concludes.

NEXT: Sizing the opportunity 

Cerulli’s report finds advisers received the majority of rollover assets last year, followed closely by self-directed IRAs. Plan-to-plan rollovers were a distant third.

According to Cerulli, the DOL’s fiduciary rule may start to quell long-term outflows from DC plans, “especially since the DOL viewpoint is that the DC plan is often the best place to leave assets.” However, Cerulli feels that, until in-plan retirement income options become more widespread, retiring participants will still opt to roll over their accounts to an IRA.

Concluding the report, Cerulli finds a majority of firms surveyed recently have either launched a retirement income product or are enhancing an existing product.

“Firms focusing on retirement income solutions are concentrating their efforts on creating new products, such as annuities or mutual funds, as well as creating new, more intuitive retirement income tools,” Cerulli says.

More information on obtaining Cerulli Associates reports is here.