A new report reveals that individual retirement account (IRA) assets reached nearly $14 trillion in 2021, thanks in large part to rollovers from defined contribution (DC) plans.
According to The Cerulli Report—U.S. Retirement Markets 2022: The Role of Workplace Retirement Plans in the War for Talent, IRA assets remain the largest segment of the retirement market. Over the past 10 years, IRA market share has increased from 31% to 38% and is expected to grow to 41% by 2027. Much of the asset growth can be attributed to rollovers from DC plans, which accounted for $2.9 trillion in IRA asset growth between 2016 and 2021.
“The exceptional capital market performance experienced during this five-year period translated to higher average 401(k) account balances and—for many higher balance participants nearing retirement—higher rollover balances as well,” notes Shawn O’Brien, associate director at Cerulli.
In the same way, however, the sharp market downturn in 2022 should place downward pressure on IRA rollover balances in 2023, resulting in slightly higher net flows into corporate DC plans, the report observes.
“Furthermore, the auto-enrollment and auto-escalation provisions within SECURE 2.0 and ongoing legislative and market efforts to expand workplace retirement plan coverage may facilitate stronger contribution growth in the years ahead,” adds O’Brien.
For many recordkeepers, capturing rollovers is a key part of their overall retirement strategy because they may facilitate financial planning and wealth management relationships, the report notes. Retirement plan providers will be essential to helping recordkeepers achieve success, O’Brien explains. “Those that nurture relationships with participants throughout their financial journey can become a path of least resistance for participants looking to roll their assets in an IRA at or near retirement or during a job/career change.”
A separate report by Cerulli—U.S. Retirement End-Investor 2022—reveals that rollovers from DC plans to IRAs reached $700 billion in 2021, with advisors intermediating $444 billion in rollover assets. According to the firm’s findings, 86% of these rollovers were through existing participant-advisor relationships—as opposed to new advisor relationships—emphasizing the importance of establishing relationships with participants during their working years.
Advisor-intermediated rollovers accounted for less than half (43%) of the number of individual DC to IRA rollover transactions. At the same time, the cumulative asset value is over half—57.7%. Moreover, the average balance for advisor-intermediated IRAs ($211,100) is significantly higher than for self-directed IRAs ($120,800), the report notes.
Cerulli further observes that, as providers evaluate IRA rollover opportunities, they must contend with investor inertia. More than half (56%) of active 401(k) plan participants allowed assets to remain in a former employer’s plan after separating from service at some point in their careers and 21.6% of all DC plan assets eligible for distribution in 2021 were rolled into an IRA, a decrease from 25.4% two years ago. This decline, Cerulli notes, was matched by an increase in assets remaining in-plan.
Plan Design and New Tech
Meanwhile, those assets that remain in-plan, as well as those resulting from large DC plan business, will be well-served by implementing new technology, the report suggests. It emphasizes that technological capabilities will be key to winning and maintaining such business in the coming years. Consequently, plan sponsors, consultants and asset managers looking to implement more progressive plan design features—including flexible, low-cost distribution options, personalized investment solutions and non-traditional investment products—will turn to their recordkeeper to facilitate these implementations.
According to Cerulli, when evaluating recordkeepers, large sponsors are most likely to consider a recordkeeper’s ability to integrate with other benefits, such as allowing participants to see their health savings accounts, equity compensation and other accounts on one website (28%).
Yet, while there is significant variety in the types of distribution options recordkeepers report offering to separated and retired retirement plan participants, few firms report that they plan to make changes to their plan distribution options within the next 12 months.
Still, account aggregation technology capable of piping data about outside accounts into a participant plan website is now used by 50% of recordkeepers. “This type of enhanced feature can help a participant to better manage and organize their finances, and address challenges faced by managed account and financial wellness providers who aim to provide holistic experiences to participants,” the report suggests.