Tags: Cerulli | 401k | cash | flow

Cerulli Associates: 401(k) Will Become Cash-Flow Negative By 2016

By    |   Monday, 09 June 2014 02:32 PM

The 401(k) system will become cash-flow negative in 2016, predicts research by Cerulli Associates.

That could disrupt the system, as asset managers are forced to sell equities.

"This has significant implications for asset managers and other financial services providers," Bing Waldert, a director at Cerulli, tells the Financial Times.

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"For asset managers, the consistent contributions are particularly appealing and provide a source of positive flows even in poor markets when a firm may experience outflows from other segments of the industry."

Cerulli estimates in its report, "Evolution of the Retirement Investor 2013," that $300 billion flowed into the system in 2012 while $276 billion flowed out as cash, as retirees made withdrawals or rolled over funds into IRAs.

By 2016, inflows will increase to $364 billion, but outflows will increase to $366 billion

Fund managers will face greater competition as workers role 401(k) funds into IRAS.

"In IRAs you are not just competing against asset managers, you are competing against the world," Waldert tells the Times. "There are insurance-based products, ETFs [exchange traded funds] and individual securities. There is more freedom and flexibility."

IRAs often have 20 percent to 35 percent in equities, compared with 45 percent to 60 percent for 401(k) plans, according to Amin Rajan, chief executive of Create Research, which indicates stock funds could lose out to funds emphasizing bonds, such as Pimco and Principal Global Investors.

"People go to the extremes," Sue Walton, director at consultant Towers Watson Investment Services, tells the Financial Times. "They get to retirement heavily weighted to equities and they make this shift to go too conservative."

Costs of managing assets in an IRA are often much higher than the institutional pricing levels secured by 401(k) s. That might prompt regulators to get involved and slow the transition from 401(k)s to IRAs, Walder predicts.

According to a study by Judy Diamond Associates, a provider of sales prospecting and plan analysis tools, one-fifth of assets in large 401(k) plans are held by retirees or pre-retirees who have not yet rolled over their funds.

That presents an opportunity to financial advisors.

"Especially with increasing numbers of baby boomers preparing to retire, the financial advisors who know how to find them now and offer guidance on the transition to individual retirement accounts, such as Roth IRAs, will be in the best position to grow their market share," says Eric Ryles, managing director of Judy Diamond Associates.

Editor's Note: These 38 Dates Are Key to Bagging $313,038

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The 401(k) system will become cash-flow negative in 2016, predicts research by Cerulli Associates.
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Monday, 09 June 2014 02:32 PM
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