You may not hear it if you're an advisor who focuses on 401(k) plans, but there's a dripping sound in the 401(k) market these days, and it's coming from dollars moving out of the system.
A Cerulli Associates report released this week shows that outflows are exceeding inflows in the nation's 401(k) plans, and that the trend is expected to continue as baby boomers retire and either take distributions or roll over their entire accounts.
The big problem advisors are going to have to tangle with is this: Although baby boomer retirees are being replaced by other plan participants, younger workers are coming into the 401(k) market with much smaller accounts.
"Baby boomers are exiting the 401(k) savings plan segment for the retail RIA market," Jessica Sclafani, Cerulli's director of retirement practice, told Financial Advisor. "They are being replaced by younger individuals who are saving a smaller percentage of a smaller salary."
Sclafani describes it as the "big accounts out, small accounts in" trend, adding that it comes as a result of both demographic changes and the maturation of the 401(k) market itself, with companies no longer starting new plans. "We don't have large employers transitioning from a defined benefit to a defined contribution plan anymore," she said.
She noted it would take 10 millennials earning $50,000 each, contributing 3 percent, to replace one baby boomer earning $100,000k, contributing 15 percent.
The Cerulli study found that from 2012 to 2017 outflows leaving the 401(k) market expanded at a five-year compound annual growth rate (CAGR) of 8.4 percent. During the same period, inflows to the market expanded at a five-year CAGR of 6.4 percent. The overall 401(k) market grew during this period, but it was due to inorganic market growth, Sclafani noted.
Whether the trend continues will be up to plan sponsors and advisors, and whether they take steps to make it more appealing for retired workers to keep their assets in company 401(k) plans, she said.
Much will depend on how companies that sponsor the larger plans in the nation proceed.
Overall, plan sponsors don't seem especially interested in keeping their retired workers' assets, according to Cerulli. A recent survey by the firm of 800 plan sponsors found that 59 percent preferred that workers take their assets and leave. About 27 percent of respondents said they preferred keeping such assets in their plan.