401k outflows are eclipsing inflows.
Global research and consulting firm Cerulli Associates finds that from 2012 through 2017, total distributions or outflows leaving the 401k market expanded at a five-year compound annual growth rate (CAGR) of 8.4 percent.
In contrast, total contributions or inflows to the 401k market expanded at a five-year CAGR of 6.4 percent.
“Cerulli points to two primary factors as [an] explanation for the 401k market’s current environment of negative net flows—demographics and maturation of the market,” Jessica Sclafani, CAIA, a director at Cerulli, said in a statement.
The 401k experiment has experienced flattened organic asset growth (excluding the impact of market performance) since 2013, and the increasing rate of outflows can be attributed to the boomer generation.
As boomers entered retirement, they began to draw down a 401k account or are rolling the entire account balance to the retail individual retirement account (IRA) market.
This demographic factor supports total distribution growth as the boomer cohort of 401k investors is more likely to have higher-balance accounts that represent many years of saving.
“While baby boomers are being replaced by millennials, these younger investors are typically deferring a smaller percentage of a smaller salary to the 401k plan,” Sclafani explained. “This creates a big accounts out/small accounts in dynamic in which large balance 401k accounts are exiting the 401k market for the retail IRA market and are being replaced by small starter-balance accounts. For example, it would take 10 millennials earning $50,000, contributing 3 percent of salary, to replace a baby boomer earning $100,000, contributing 15 percent of salary.”
“Asset managers and recordkeepers that participate in the 401k market will need to be conscious that while the 401k market will continue to evolve in terms of plan design and ability to serve participants through retirement, it is now a mature segment,” Sclafani added. “Organic asset growth will require an outside catalyst(s) such as success in converting the largest of plans to position themselves as a final stop for retirees’ assets, and/or the passage of meaningful retirement legislation.”