Providers retain smaller portion of rollover assets

BOSTON — Defined contribution providers retained only $32 billion of $150 billion in rollover assets last year because of difficulties implementing effective strategies that link their institutional and retail platforms, according to a new report by Cerulli Associates Inc.

The almost $120 billion loss was a record, indicating that defined contribution providers continue to have problems in capturing assets that are rolled over from qualified plans into individual retirement accounts, the report noted.

"A major reason for the lack of retention is the relations (of DC providers) with plan sponsors," said Luis Fleites, senior analyst for Boston-based Cerulli. "Plan sponsors have a huge role in rollovers."

Defined contribution providers' marketing efforts to capture rollovers need to reach plan sponsors as much or more than participants, he said. "Plan sponsors will say how you (a DC provider) can approach and market to participants for distribution presentations or offer kits directed to rollover products," he said. "Plan sponsors are concerned that providers are really trying to help participants and not just trying to sell products."

Underscoring the importance of the rollover market to financial services providers, the report estimates that some $1.9 trillion will roll over from defined contribution plans to IRAs from this year through 2010.

The $150 billion in total rollover assets for 2003 was a record, reversing three years of shrinking flows, according to the report.

"The surge in rollover inflows — $19 billion more than in 2002 … is partly attributable to rising equity markets," the report noted. "It also partly reflects the lingering effects of layoffs, early retirements and job terminations during the bear market."

The surge "may also indicate ongoing success with employee education initiatives encouraging rollovers. While down from an all-time high of 71% (in 2000), the ratio of rollover inflows to corporate defined contribution distributions settled at 62% for 2003 — up from 56% in 1997." Corporate distributions totaled $243 billion in 2003, Mr. Fleites said.

"The mobility of the work force and the approaching baby boomer retirement guarantee a steady flow of annual IRA rollover contributions, and the battle to capture these assets is heating up," according to the report. "Providers servicing retirement plans and retail assets are racing to better understand the competitiveness of the IRA product and to develop a viable strategy to differentiate their product."

Among Cerulli's findings:

• IRAs held more than $3 trillion at year-end 2003, representing a larger market than the $2.4 trillion in defined contribution plans. Sometime around the late 1990s, IRAs became a bigger market, in terms of assets, than defined contribution plans, Mr. Fleites noted.

• The defined contribution plan marketplace is "now approaching its apex as the baby boom generation prepares to retire. Participants 50 and older now hold 59% of 401(k) assets." In previous years, they held a small proportion.

• DC providers retained about 21%, or $32 billion, of rollover assets transferred from their 401(k) record-keeping systems — an increase of only two percentage points from 1999.

• The proportion of cash-out distributions remained roughly unchanged, at 20%, since Cerulli's last measurement four years ago. "The inability of providers and plan sponsors to decrease the cash-out rate over the last four years suggests that they continue to face difficulties in changing participant behavior."

• "While job changers are responsible for more rollovers, retiring boomers are responsible for larger ones. Job changers account for 61% of recent rollovers — but only 46% of recent rollover assets."

• "Providers still face difficulties capturing large rollover accounts, as few truly exist. Only 19% of rollover IRAs hold more than $75,000." By contrast, the average 401(k) account holds $39,000. "Some 29% of lump-sum distributions are less than $10,000."

• "Direct-sold mutual fund companies and broker-dealers are experiencing the greatest success at retention.… Mutual fund companies only hold 44% of the 401(k) marketplace but represent 66%," or $22 billion, of retained rollover assets. "Broker-dealers only represent 7% of the 401(k) arena, but hold 14% of retained rollover assets." Third-party administrators, which represent 29% of 401(k) assets, account for 5% of retained rollover assets.

• "Current customers account for approximately 54% of new rollover accounts, almost evenly split between existing clients with new rollover accounts and existing clients transferring accounts from other rollover providers."

"I wouldn't say it (retention) is worsening for providers," Mr. Fleites said. "But a growing amount of money is up for grabs, and that will accelerate as baby boomers retire. It could worsen if firms aren't able to do a better job" in retaining assets.