Math on Net 401(k) Outflows Not So Troubling

Because of the 77 million Baby Boomers between the ages of 51 and 69 who are now beginning to retire, distributions from 401(k) plans will likely start to outpace contributions in 2016, according to Cerulli Associates. “As the number of retirees increases, the 401(k) market outflows will increase,” says Bing Waldert, a director at Cerulli.

Cerulli projects that rollover contributions will increase at a compound annual growth rate of 5.5% from the end of 2013 to the end of 2018, reaching nearly $470 billion in 2018. Compare this to the $500 billion net inflows for 401(k) assets observed from the fourth quarter of 2013, when they totaled $6.3 trillion, to the fourth quarter of 2014, when they reached $6.8 trillion, according to data from the Investment Company Institute (ICI). Unless contributions pick up in a big way, it’s likely they will be outpaced by distributions in the relatively near term.  

Interestingly, since the ICI began tracking 401(k) contributions in 1984, the 401(k) industry has experienced net outflows in only two years, due to market corrections; in 2000, following the dot-com crash, assets in 401(k) plans dropped by $3 billion, and in 2008, when the Great Recession hit, they dropped by $1 trillion.

“Despite the outflows [in terms of contributions versus distributions] we foresee for the next five to 10 years, we expect the 401(k) industry to sustain an annual growth rate of 5% over the next decade due to strong market returns,” says Jessica Sclafani, senior analyst at Cerulli.

Advisers and sponsors still need to encourage greater savings in 401(k) plans among active participants, warns Saan Duggal, research analyst at Cerulli. They can achieve this through “optimal plan design, stretching the match, using auto features and enrollment meetings,” Duggal says. As Boomers continue to retire and outflows increase, “sponsors definitely should be focused on their plans’ health, and encouraging contributions will play a huge role in that.” 

Advisers’ Reactions

Retirement plan advisers say that even if Baby Boomers’ rollovers and distributions from 401(k) plans continue to pick up, they are not overly concerned about 401(k) plan outflows, for a number of reasons. “When you think about all of the enhancements that advisers have used with automatic enrollment, that could potentially offset outflows,” says Dan Peluse, director of corporate plan services at Wintrust Wealth Management in Chicago.

“Another thing that could be a game changer is the Department of Labor’s fiduciary redefinition,” Peluse adds. “Depending on what happens with the IRA portion, folks might be more willing to leave assets in their 401(k) due to lower costs and the availability of service” from recordkeepers and advisers.

Furthermore, if the DOL provides guidance on income-producing products in 401(k)s and/or annuities that are “portable and cost effective, that will be a huge factor in retired participants’ decision to remain invested in the plan,” he says.

Ellen Lander, principal at Renaissance Benefit Advisors Group in Jamison, Pennsylvania, says her practice has been encouraging participants to remain invested in their 401(k) after they retire. First, this gives the participants access to funds that Renaissance Benefit Advisors’ monitors “to make sure they are prudent and cost effective,” as funds in a 401(k) plan are subject to the Employee Retirement Income Security Act (ERISA). Second, it gives the plan the leverage of having larger assets and therefore the ability to negotiate lower administrative and investment management fees.

Despite Cerulli’s projection of ballooning outflows from Boomers, the fact remains that many Baby Boomers are delaying retirement, adds Jim Sampson, managing principal of Cornerstone Retirement Advisors LLC in Warwick, Rhode Island. “People aren’t retiring as they used to,” Sampson says.

“The Baby Boom generation cannot afford to retire,” agrees Robert Kieckhefer, managing partner of The Kieckhefer Group in Brookfield, Wisconsin. “401(k) plans didn’t become prevalent across the board until the mid-1990s, so Boomers didn’t start investing in them early, and they didn’t make serious contributions to them early, either, so I am not concerned about Boomers’ outflows from 401(k)s, and I don’t think it should be a huge concern for sponsors.”

Regardless of how Boomers’ outflows may impact plans, it is incumbent on the retirement plan industry to encourage people to save more and to start early, Sampson says. “Advisers and sponsors should be thinking about this anyway,” he says. “Young people need to get over their procrastination and start saving now because it is hard to catch up, and for those entering their prime earning years but who have never increased their contributions, we need to touch base with those people and get them to increase their contributions.”

And for those who worry about the sheer number of Baby Boomers who are starting to exit the plans, it is important to realize that there are 80 million Gen Y and New Millennials on their heels, says Rita Fiurmara, first vice president, investments, at UBS Retirement Plan Consulting Services. “They will be the net big contributors to these plans, and a lot of New Millennials are better savers than Baby Boomers,” she says. “You have this whole new workforce coming in en masse.”