Youve undoubtedly seen the commercials on TV advising you to take your savings out of your old 401(k) and invest in the advertisers individual retirement account. Even if youve missed these pitches, you may be among the many workplace-savings-plan investors who mistakenly believe that their 401(k) plan assets must be transferred to an IRA account when separating from a former employer. This long-held belief has helped build the IRA market to $6.2 trillion today.
Now, several changes looming on the horizon may stem this steady flow of assets.
Rollovers, along with market appreciation, have long been the primary drivers of IRA growth, reports Cerulli Associates in its U.S. Retirement Markets 2016: Preparing for a New World PostConflict of Interest Rule, published in December. The report warns, however, that heavy reliance on these two components of growth could be problematic for the traditional IRA market in the coming years.
The primary factor that could slow IRA rollover growth is the April 10, 2017, start of the Department of Labors fiduciary, or conflict of interest, rule. The new rule requires more stringent advice and sales criteria for financial advisers and will affect those who sell commission-based products like those in the TV ads.
But even if the DoL rule is sidelined by the new Trump administration, as some say it will be, there is another change in the workplace retirement savings landscape that will influence IRA growth: the burgeoning growth of lifetime income options, often annuities, incorporated into 401(k) plans.
If more plan sponsors allow participants to move money into lifetime income, it would curb IRA rollovers, says Jeffrey Snyder, the national public markets practice leader and recordkeeping expert at Cammack Retirement Group in New York.
Today only 8 percent of 401(k) plan sponsors offer an in-plan annuity or insurance product as part of its fund lineup, reports Aon Hewitt in its 2017 Hot Topics in Retirement and Financial Wellbeing, released this month. Another 3 percent say they are very likely to offer a lifetime income solution this year. That is primarily because plan sponsors want more guidance from the DoL.
But solutions without insurance guarantees are being taken up at a higher rate, says Winfield Evens, director of outsourcing investment strategy at Aon Hewitt, pointing to the 29 percent of sponsors who offer managed accounts with a drawdown feature. A further 10 percent surveyed say they are very likely to offer this plan option.
If this trend continues, and there is an ongoing adoption of retirement income solutions within 401(k) plans, then we may see a lower percentage of assets going into IRA rollovers than has happened historically, says Evens.
Sabrina Bailey, head of defined contribution at Northern Trust, offers another factor that may aid 401(k) asset retention: auto-portability or the ability to take your 401(k) assets to your new employers plan. A ream of paperwork requirements has until now made it difficult to roll retirement plan assets from one employers plan to another as workers change jobs. Its a huge paperwork nightmare, says Bailey. Until now, an IRA rollover has been the easy alternative since IRA salespeople do most of the heavy lifting required in the asset transfer. As auto-portability is adopted by plan sponsors, employees who make frequent job changes will be able to easily take their assets with them.