Defined contribution executives are wrestling with a 401(k) plan strategy whose theme is best described by the band The Clash: “Should I Stay or Should I Go?”
Executives' attitudes always have varied about encouraging participants to keep their money in the plans when they retire or leave the company, but these attitudes will be buffeted by the Department of Labor's fiduciary rule impact on advisers and IRA rollover specialists.
“There is a generalized expectation that greater assets will stay in plans” due to enactment of the fiduciary rule, which requires more responsibilities for advisers, some of whom may be discouraged from pursuing rollovers, said Jessica Sclafani, associate director retirement at Cerulli Associates Inc., a Boston-based financial research firm.
The rule takes effect in April. Even with a new president — Donald J. Trump will take the oath of office in January — and a new labor secretary, “we expect the conflict of interest rule will move forward as planned,” Ms. Sclafani said.
The corporate DC approach to stay vs. go has been pegged to a corporate philosophy regardless of outside events. Some plans want retirees to keep their money in the plans, noting that having more assets gives the plans greater bargaining power and the opportunity for lower fees. Others are happy to see retirees leave, especially if they have small balances, to reduce administrative costs.
Ms. Sclafani, other researchers and DC plan consultants say larger plans are more likely to encourage participants to keep their money in the 401(k) plans instead of rolling over those accounts into an IRA.
In a survey of DC record keepers conducted during the first half of 2016, Cerulli and The Spark Institute found that 73% believe more assets will stay in corporate DC plans due to the fiduciary rule, also known as the conflict of interest rule.
“The basis for this assumption is that the increased scrutiny and additional work that will be required of a financial adviser” in the rollover process “will act as a serious impediment to future rollover flows,” Ms. Sclafani said. The survey covered 25 record keepers with nearly $4 trillion in assets under management.
In a separate Cerulli survey of managers specializing in defined contribution investment only, 59% said they believed assets will stay in DC plans vs. rollovers thanks to the fiduciary rule. The results are based on comments from 29 asset managers responsible for $1.7 trillion in DC assets who were interviewed in the second quarter of 2016.
The prospect of more assets being held in DC plans comes at a time when outflows from corporate plans are greater than inflows. “This will be a widening trend for the rest of the decade,” said Ms. Sclafani.
According to Cerulli research to be published next month, outflows exceeded inflows by $40 billion last year. Corporate DC assets totaled $4.9 trillion last year. The results were based on analysis of Form 5500 filings.
Outflows started exceeding inflows in 2013 and continued in 2014, said Ms. Sclafani, declining to provide additional details.