Big news, and blame baby boomers. The Wall Street Journal had BrightScope analyze government data, and the findings show the shift from accumulation to distribution in 401(k) plans has begun.
“Investors pulled a net $11.4 billion from tax-deferred savings plans in 2013 …ending decades of expansion,” the paper reports. “The movement out of 401(k)s is expected to accelerate in the coming decade as more baby boomers retire, squeezing large money-management firms that rely on fees charged to employers and investors as a chief profit engine, some analysts said.”
The Journal adds that asset managers hope they can replace the outflows with a new surge from millennials or other products, such as individual retirement accounts. One industry data provider said most funds leaving 401(k)-style plans are migrating to IRAs. Large money managers will be forced to cut fees, offer different products or consolidate operations.
“Assets held by 401(k) plans ballooned to $4.6 trillion in the fourth quarter of 2014, up 171% from $1.7 trillion in 2000, according to the Investment Company Institute, a trade organization for mutual funds. Now the 401(k) generation is ready to take its money out as the number of Americans reaching retirement age this year is expected to hit 3.5 million, up from 2.7 million in 2010, according to J.P. Morgan Chase and Census Bureau data.”
The biggest 401(k) operators in the U.S. noticed the shift first since they generally serve older workers, according to BrightScope. In the past four years, investors pulled a net $12.8 billion from the top 25 plans by assets, according to BrightScope.
Estimates vary on how long the 401(k) net outflows will last and how severe they will become. Financial-services research firm Cerulli Associates projects outflows will persist at least until 2019 when investors will pull an estimated $51.6 billion, according to a December report. J.P. Morgan predicted in its April note the trend will last through 2030, with outflows peaking at $40 billion in 2019.
“That money could stay with the retirement industry if baby boomers move 401(k) funds to IRAs,” the paper concludes. “Contributions into IRAs are expected to reach $546 billion by 2019, up from $205 billion in 2003, according to Cerulli.”
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
