Growth in 401(k) assets has stalled to such an extent that plan executives must take extra steps — such as encouraging retiring or departing employees to keep their accounts in the plans — to maintain progress, according to a new analysis by Cerulli Associates, Boston.
Excluding market appreciation, the Cerulli report shows that organic growth has been flat to slightly negative between 2013 and 2017. Organic growth is defined as employee contributions, employer contributions such as a company match and other contributions such as roll-ins in which a participant transfers accounts to a current employer from a previous one.
Based on its analysis of Form 5500s and its own research, Cerulli found inflows were barely positive in 2013 and 2016, when inflows exceeded outflows by 0.1% each year.
Outflows outpaced inflows by 0.3% in 2014, 0.2% in 2015 and 0.1% in 2017. The firm's preliminary estimate for 2018 is for outflows to exceed inflows by 14%.
Even during the depths of the financial crisis, 401(k) contributions exceeded distributions, according to the Cerulli report, which is scheduled for release Jan. 16.
"The reasons are partly demographic and partly due to 401(k) plans being a mature market," Jessica Sclafani, director of Cerulli's retirement practice, said in an interview describing the changes in organic growth.
As more baby boomers retire, they are taking their assets out of their respective 401(k) plans and putting them into rollover individual retirement accounts. Although these workers are being replaced by younger employees, the latter group is putting less money into their retirement accounts, she said.
Ms. Sclafani refers to this phenomenon as "big accounts out; small accounts in." As a hypothetical illustration, she said a baby boomer earning $100,000 annually who contributes 15% of salary to a 401(k) plan is saving the same amount as 10 millennials each earning $50,000 while deferring only 3% of salary.
One way plans can improve the ratio of inflows vs. outflows is to encourage soon-to-be-retired employees or employees leaving for another job to keep their account balances in the plans, she said.
The education campaigns can explain that institutional plans can negotiate better fees than can individuals in retail IRAs and that institutional plans can offer some investment options, such as stable value, that aren't available in IRAs.
However, another Cerulli study shows most 401(k) plan executives don't want the assets of retirees or former employees to remain in their plans.
Although 27% of plan executives said they would like these assets to stay, 59% said they would like the assets to go.
That 59% figure breaks down to 22% of plan executives preferring that the assets be rolled over into an IRA; 20% preferring that the assets be rolled into another employer's plan if possible; and 17% preferring that participants take a lump-sum withdrawal.
These do-not-prefer responses are virtually identical among three sizes of plans: those with more than $250 million in retirement assets; those with $25 million to $249.9 million; and those with less than $25 million.
The largest plans were the most willing to retain the assets, at 33% ,vs. 30% for the middle group and 21% for the smallest group. The responses were based on a survey of 800 plans conducted during the fourth quarter of 2018.
Other ways to increase organic growth are for plans to encourage roll-ins and improve auto features with higher initial deferral rates and greater use of auto-escalation, Ms. Sclafani said.
Cerulli's research also illustrated the role that market appreciation has played in recent years in the growth of 401(k) plan assets. Last year, total assets were $5.45 trillion vs. $3.45 trillion in 2012. During that time, market appreciation represented a gain of $2.01 trillion while organic growth fell by $18.7 billion to $1.86 trillion as distributions outpaced contributions.
