An “alarming” amount of money is being taken out of retirement accounts, according to Morningstar, a provider of investment research.
The constant outflows from defined contribution plans, which totaled $4.61 trillion between 2011 and 2020, are mostly due to rollovers and cash-outs, Morningstar said in a report released in early March.
The report, called the “Retirement Plan Landscape Report,” marks the launch of Morningstar’s new Center for Retirement and Policy Studies.
The result of the outflows from retirement plans means the assets within the plans have decreased. That, in turn, reduces the leverage retirement plan sponsors have when negotiating with asset managers. “More assets in the defined contribution system would help more sponsors gain the leverage to demand lower fees from asset managers and drive down costs for end investors,” Morningstar said.
The report also said the fees paid to manage and administer retirement plans should be of concern to the sponsors.
“Some investors who participate in small plans pay around double the cost to invest as participants at larger plans. This is an issue industry leaders and policy makers must address, because these differences in fees can add up, leaving participants with fewer assets at retirement and less ability to achieve their retirement goals,” Morningstar concluded.
In addition, “sponsors appear to have shied away from considering environmental, social and governance information and analysis, in part because of regulatory uncertainty. In doing so, sponsors have left the U.S. defined contribution system in the aggregate tilted toward investments with more ESG risk,” the report said. “The degree to which companies fail to manage ESG risks potentially imperils their long-term economic value,” Morningstar warned.
In the coming months, the center will examine lifetime income provided by defined contribution plans; the new, anticipated federal fiduciary package; and the state of overall retirement preparedness among older workers.
“There is a lot of great research out there, but some of it lacks in transparency and doesn’t dive deeply enough into areas like plan investment holdings, plan quality and participants costs. We want to change that,” said Aron Szapiro, head of retirement studies and public policy at Morningstar Investment Management, in a statement. “By using Morningstar’s independent data and capabilities, we can shed light on these areas and bring clarity around the true state of the U.S. retirement system.”