PALM BEACH, Fla. - Capturing 401(k) rollovers has been top of mind for mutual fund companies for years. Now, with billions of dollars flowing out of equity funds, $682 billion in September alone, mostly into cash, capturing 401(k) rollovers and moving money out of cash and safe bets back into equities is the name of the game.
For years, financial experts have been trying to figure out how to capture the trillions of dollars in assets being rolled over into Individual Retirement Accounts by retiring investors and job changers every year, but they have been continually stumped by investor behavior.
When average investors were handed the keys to managing their retirement savings, many plan sponsors thought if they provided a wide range of good products, investors could pick the most appropriate plan for their income needs and risk tolerance. Instead, investors did nothing to manage their own plans, but still expected to have a comfortable retirement.
Automatic enrollment into company 401(k) plans made sure that investors got into their plans, but most left their allocations at whatever the default was, typically an extremely safe money market fund. When they changed jobs every few years, their retirement savings were rolled over into an IRA and then forgotten as they started a new 401(k) with a new employer. None of this, of course, has helped mutual fund plan administrators build customer loyalty.
Now, with more advanced qualified default investment alternatives available and a crazy stock market that has everyone worrying about their 401(k)s, plan sponsors are hoping investors will start paying more attention to their savings and start consolidating all their small IRAs. For fund companies, this could be a shining moment.
"There is a tremendous opportunity in the market today," said Thomas Loch, president and chairman of the board of Wealth Management Systems, at the 2008 SPARK Forum, held recently at The Breakers hotel. "A significant portion of participants are cashing out. In the next few years, trillions of dollars will be in transition. There is a huge opportunity to further the assets on your books."
The role of defined contribution plans in retirement accounts will see a dramatic shift in the next few years, due to external forces such as changing market risks, regulatory reforms and major demographic shifts, said Céline Dufétel, an associate principal at McKinsey & Company.
By 2015, Dufetel said the DC market will be transformed from an asset accumulation and recordkeeping business into a broad platform for providing lifetime retirement savings and security. As millions of Baby Boomers retire, they will continue to divert trillions of dollars into IRAs.
The convergence of 401(k) and 403(b) plans into similar platforms with similar regulations will blur many of the lines that have kept these two separate, creating a new competitive environment and opening doors to crossing over, Dufetel said.
"Income solutions will be the next battleground," she said. "There is a huge appetite among participants and plan sponsors, but the traction of these products has been varied. Guaranteed income products might be what we need to get plan sponsors interested."
"Rollover markets are exceptionally large," said James Langenwalter, chief marketing officer for RolloverSystems. "But it seems like nobody's interested in dealing with the $20,000 or $50,000 accounts."
While providers collect larger fees from larger accounts, smaller accounts are also important and can grow with the right nurturing.
"If most accounts transferred are in small balances, it means there's a great deal of education needed," Langenwalter said. "When participants seek help, they should have access to a variety of investment products."
There are several ways to make sure all participants receive the services they need, Loch said. Accounts with balances below $25,000 can be served primarily by a provider's website, accounts between $26,000 and $100,000 can be served with the website and a call center or rollover desk, and the large accounts in excess of $100,000 warrant the services of a personal financial adviser.
Langenwalter said 70% of accounts have less than 30% of total assets, and 40% of accounts have less than $10,000. Of the 30% of accounts that hold 70% of the assets, 19% of those accounts hold assets greater than $100,000.
A large percentage of accounts remain dormant for many years when an employee leaves a company and switches to a new account, but those pennies add up.
"Massive inflows will propel defined contribution plans to nearly double in the next 10 years, becoming one of the largest retirement markets," Dufetel said.
As a consequence, DC investing will shift dramatically, with asset-allocation funds attracting more than 35% of assets by 2015, siphoning flows away from traditional funds and stable-value products, she said. Passive products will double.
The DC landscape in 2015 will see a four-way race between at-scale bundled providers, large innovative insurers with strong risk management expertise, leading investment-only DC asset managers and new entrants such as institutional asset managers, pension consultants and retail financial advisers, Dufetel said.
Asset-allocation funds will see huge growth in the coming years, she said, due to the dominance of target-date funds as a QDIA, a strong demand by participants to select their own investment options, and a reallocation of stable-value and money market funds.
Providers need to address the needs of Baby Boomers and job changers, build customer loyalty and brand awareness with current participants, enhance their product and service offerings, and empower their financial advisers to address rollover opportunities directly, Loch said.
Above all, providers need to simplify the rollover process, he said.
"Retirees accounted for 51% of rollover assets in 2004, but only 38% in 2007," Loch said. "The number of participants who are consolidating their assets is on the rise, up from 12% in 2004 to 22% in 2007."
"You clearly have an opportunity to establish a relationship with these individuals and keep them on your platform," he said.
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