Data & Research January 9, 2008

Switch From DB to DC Lowered Retiree Replacement Income

New research from the Center for Retirement Research at Boston College (CRR) suggests the change in the retirement landscape from predominately defined benefit plans to mostly defined contribution plan coverage has decreased both household pension wealth and retiree income replacement rates.
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According to the CRR Issue Brief, during the period 1992 – 2004, the increase in DC plan participation and plan balances as DB plan coverage declined, was not enough to maintain average household benefits and income replace­ment rates. The typical household with a head who was 51-56 years old had about $114,000 in pension wealth in 2004, about 11% less than in 1992, the report said.

In addition, the CRR researchers found that between 1992 and 2004, the ratio of expected benefits to total current earnings of households (income replacement rate) declined from 32% to 26%.

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The researchers pointed out there will be a continuing dependence on employer-sponsored retirement plans as the role of Social Security lessens. According to the report, Social Security currently replaces around 40% of pre-retire­ment income for the average household, however, three factors will lead to a reduction of benefits relative to pre-retirement earnings:

  • The increase in full retirement age from 65 to 67,
  • Medicare premiums, which are deducted from Social Security are slated to rise dramatically, and
  • A greater share of benefits will be taxable under the personal income tax because the threshold levels above which benefits become tax­able are not indexed for inflation or wage growth.

The CRR used data from the Health and Retirement Study (HRS) for its comparison of employer-sponsored pension wealth across households with heads age 51-56 in 1992, 1998, and 2004.

HRS data indicated that in 1992, 62% of households were covered by an employer-sponsored plan, compared to 66% in 2004. However, while overall plan coverage remained stable, the proportion of older households with pensions relying solely on a defined benefit plan declined from 36% in 1992 to 19% in 2004.

At the same time, the number of households depending only on defined contribution plans for retirement income increased from 27% in 1992 to 44% in 2004. The number of households with both DC and DB coverage remained relatively stable (37% in 1992 v. 38% in 2004).

The CRR Issue Brief can be found here.

The Markets January 9, 2008

Other Investment Vehicles to Eclipse Mutual Fund Net Sales

Mutual fund net sales will trend up by 2% annually, but investors will have to look elsewhere for the real significant growth, according to a new study.
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The Financial Research Corporation (FRC) said its new research predicts mutual fund sales reaching $340 billion by 2012, but other products will enjoy a growth rate eight times that of net fund sales. Exchange-traded funds (ETFs), managed accounts, and hedge funds should all see double-digit net sales growth, FRC said in a news release.

The report examines trends and behaviors impacting the future of mutual fund sales through the six intermediary channels (national brokers, regional brokers, independent brokers, banks, insurance carriers, and RIAs).

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“Another significant shift we project is the continued increase in gross sales via the intermediary distribution channels relative to the other channels,” said Ian Rubin, lead study author and senior vice president of retail investment markets research, in the news release. “Gross sales through intermediary channels will represent 61% of sales by 2012, a significant increase from 50% in 1999. That growth will come at the expense of the Direct-to-Investor channel, which will continue to atrophy significantly.”

The report also says that national brokers will see great change in their distribution channel. “Among the issues are Wachovia’s purchase of A.G. Edwards, which may trigger a series of other mergers that could fundamentally alter the distribution strategies of fund companies, the growing use of alternative products, and the increasing influence of due-diligence groups at the home-office level in selecting products for distribution through their advisor forces,” Rubin said.

The independent channel should see steady sales growth over the next five years. FRC estimates that mutual fund assets held in the channel will reach $830 billion by 2012, a compound annual growth rate of 12%. The number of independent advisers has doubled over the past three years due to adviser migration to the channel and the transition of larger firms, such as Ameriprise, to the independent category.

“Over the next five years, we see the bank channel growing quickly and improving its positioning relative to other intermediary distribution channels,” said Rubin. “Among the forces in play: the wave of bank mergers and acquisitions, the use of platform programs to service the lower end of the investor wealth spectrum, and the move toward broader open architecture to improve asset and fee generation.’

Information for obtaining a copy of the report can be found at http://www.frcnet.com/frc-market-sizing-2007-study.asp.

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