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Advice Could Attract More 401(k) Rollovers


ARLINGTON, Va. - Mutual fund companies have done a good job of banking assets in 401(k) plans, but with so many people retiring or changing jobs, fund companies often lose those assets at those rollover junctures. With some strategic marketing and some personal advice, however, funds can increase their chances of hanging onto money that rolls out of 401(k) plans, reports Boston-based Cerulli Associates in a recent study, "The Retirement Income Market and Asset Retention Strategies."

Joshua Dietch, a consultant at Cerulli, presented the results of the study at the recent Retirement Income Conference hosted by the National Association for Variable Annuities here. Dietch pointed out that defined contribution (DC) plans and IRAs now represent 70% of the $6.6 trillion in retirement assets. Defined benefit plans make up the remaining 30% of those assets.

Within the DC market, 401(k)s dominate and are the only type of plan that has not recently experienced net outflows, Dietch said. Assets within 401(k)s have grown from 62% of the DC market in 1994 to 73% this year, and Cerulli projects they will rise to 77% of DC assets by 2011.

On the one hand, Dietch said, employees have accelerated contributions to 401(k) plans because of new provisions in The Economic Growth and Tax Relief Reconciliation Act of 2001. However, on the other hand, Dietch continued, an aging population and the increasing mobility of the workforce has spurred 401(k) rollovers into IRAs. By 2020, Cerulli projects $10 trillion in IRA assets will originate from 401(k)s.

While 51% of plan participants end up taking their lump sum 401(k) distributions in cash, those assets represent only 14% of total distributed assets. In fact, 83% of 401(k) assets from lump sum distributions end up in IRAs.

Investor behavior has shifted along with changes in American society, creating an opportunity for financial services companies to meet a consumer demand, Dietch said. "People are looking more to the retail market for retirement solutions," he explained.

Where do the assets go? Broker/dealers win out in the fight for 401(k) rollover assets. While only 11% of 401(k)s start out with broker/dealers, 40% end up there. Mutual funds capture 50% of the 401(k) market but constitute only 41% of post-rollover assets, according to the study.

Advice is Key

Advice is the lynchpin to the retirement market, Dietch said. Investors with a trusted adviser will solicit that advice when deciding the fate of their 401(k) assets.

Only 15% of investors with fewer than $5,000 in plan assets stick with their current provider. "At higher asset levels, investors are satisfied with the level of service they are receiving," Dietch said. The size of 401(k) assets also correlates with the tenure of an adviser, he pointed out, meaning that the well-heeled clients are more likely to have established adviser relationships. Therefore, funds may find particularly fertile ground with mid-sized clients who have between $10,000 and $50,000 in 401(k) assets. Such investors seek more than simple self-directed services but don't warrant full-service brokerage service, he said.

A longer-range view to 401(k) rollovers will help fund companies hang onto these assets, concluded Dietch. "Don't think of rollovers as a point-in-time transaction," he warned, explaining that funds need to consider other services and needs for the 401(k) investor well ahead of the time when they conduct the rollover. The richer the investors' experience, the more sticky their assets become, Dietch said. Although funds may set their sites on the big fish, even a relatively small 401(k) rollover may provide the key to an investor's entire pool of household savings, he said.