July 24, 2000
Fund companies are increasing their efforts to provide advice to 401(k) plan participants in order to develop a relationship that will steer a greater percentage of the assets rolled over from 401(k) plans to them, according to industry analysts.
Of the $300 billion that is rolled over from 401(k) plans annually, $180 billion is rolled over by employees switching jobs and $120 billion by retirees, according to a study released in March by Sanford C. Bernstein Research of New York. Individual retirement accounts captured $200 billion of the rollover assets last year, the study found. Plan providers retained only 15 to 20 percent of those assets, according to the study.
Offering investment advice from a third party is the latest means of retaining rollover assets, said Mark Walker, a senior consultant with NewRiver, an investor communications provider in Andover, Mass. Through a third party advice firm, plan providers can promote other products and services, including IRA's, he said.
If participants are satisfied with their 401(k) investments and they like the advice they receive, there is a strong chance they will roll their assets into a plan provider-sponsored IRA account in order to maintain the advice services and the investment products, he said. But, there is no data to support this notion because 401(k) advice is such a new offering of plan providers, he said.
NewRiver provides technical consulting and customer support for ClearFuture, the online 401(k) advice product of Morningstar of Chicago.
As assets in 401(k) plans have grown, the stakes for plan providers have also grown, said Ted Benna, president of the 401(k) Association of Bellefont, Pa., an advocacy group. Benna is also a developer of the 401(k) concept.
"The sums of money walking out the door are larger than before," he said. "[Fund companies] have put a lot of work into helping people grow that money and it's stupid to let it go."
In the past two years, plan providers have become more aware of the assets they are losing to 401(k) rollovers and are placing a greater emphasis on retaining those assets, said Gerry O' Connor, a senior consultant with The Spectrem Group, a research company based in San Francisco. Providing advice and education is seen by many providers as the best method of developing a link to participants, he said. That link could play a crucial role in participants' decisions to keep their assets with the provider when they need to roll them over, he said.
Another product that is currently being developed and is scheduled to be introduced later this year will allow participants to keep the same plan regardless of career moves, Benna said. The product will offer plan portability by diminishing plan sponsors' roles in providing investment options, he said. The product will require participants to take greater responsibility for their investment decisions, he said. But the new product will offer more comprehensive advice then other products, he said. Benna declined to disclose the company developing the product.
Plan providers have also gotten better at informing participants leaving 401(k) plans of their investment options and alerting them of the tax implications of cashing out of their plans, said Trisha Brambley, president of Resources for Retirement Plans, a consultant to plan sponsors based in Newtown, Pa. Those efforts are designed to make it easy for a participant to roll his money into a fund or an IRA sponsored by the plan provider, she said.
But judging by the number of participants that are still cashing out of their plans, those efforts have not had much success, she said. Plan providers could capture a greater percentage of rollover assets if they dedicated more resources to educating participants on the importance of reinvesting these assets, she said.
Fifty-seven percent of plan participants changing jobs last year spent their 401(k) assets, according to a study released in May by Hewitt Associates, a defined contribution service provider in Lincolnshire, Ill., that monitors approximately 1.5 million 401(k) programs.
Many participants that cash out of their 401(k) programs view the money as a windfall and spend it on credit card debt, cars and other short-term expenses, said Laura Frighetto, a spokesperson for Hewitt.