A number of trends are reshaping the retirement plan landscape in the United States. Retirement assets are growing, but more so in Individual Retirement Accounts than anywhere else. Assets in defined contribution plans are going up, but only because of capital market gains; in that segment, withdrawals have begun to outpace contributions. Meanwhile, target-date funds continue to collect the lion’s share of new contributions to 401(k) plans.
Overall assets in U.S. retirement plans are growing at a smart clip and are projected to reach $28.9 trillion by 2020, up from $22.2 trillion in 2016, said Jessica Sclafani, director, retirement practice, for research firm Cerulli Associates, speaking at the 2018 SVIA Spring Seminar in Orlando, Florida.
Sclafani said public and private employer-sponsored plans accounted for about 64 percent of retirement plan assets in 2016, but are expected to account for only about 59 percent by 2020. Meanwhile, assets in Individual Retirement Accounts are expected to grow to $11.9 trillion by 2022, up from an estimated $8.4 trillion in 2017. However, she noted, much of the new IRA money simply represents assets that are being transferred from workplace plans to IRAs as the baby boomer generation continues to retire.
Sclafani noted that the only segment of the retirement plan market whose market share is expected to contract between 2016 and 2022 is the corporate defined benefit plan segment. While total assets in defined benefit plans will go down only slightly, she said, the segment’s market share is expected to contract to 10 percent from 13 percent.
That market-share downturn is not terribly surprising, given that corporations have been freezing or terminating defined benefit plans for a couple of decades now in favor of defined contribution plans. Somewhat more surprising is that distributions from defined contribution plans began to exceed contributions in 2013, a phenomenon that Cerulli forecasts will accelerate between now and 2022. Contributions fell to 96 percent of distributions in 2013, and are expected to contract to 88 percent by 2022. Nonetheless, total assets in defined contributions are still rising, due largely to capital market gains.
For plan sponsors who encourage participants to remain in their defined contribution plans after they stop working, Sclafani said, one of the biggest challenges will be figuring out how to help those participants convert their savings into a steady stream of income. Right now, Sclafani elaborated, most defined contribution plans don’t have a true retirement income solution as there’s often a significant disconnect between the way plan sponsors, plan participants and plan provides define income solutions.
Within the 401(k) market, Sclafani said, assets in target-date funds totaled $1 trillion in 2016 but are projected to reach $3.1 trillion by 2022. Target-date funds were collecting 50 percent of all new 401(k) contributions in 2016, but that figure is expected to reach 85.4 percent by 2022, at which point they would represent about half of all 401(k) assets—up from 22 percent in 2016. Three companies—Vanguard, Fidelity and T. Rowe Price—accounted for 63 percent of target-date fund market share in 2016.
Looking ahead, Sclafani said, the next big developments in the target-date space are likely to center on the introduction of hybrid target-date/managed account investment options, configured either as “dynamic [qualified default investment alternative, or] `QDIA’” investments or “personal” target-date funds. With dynamic QDIAs, plan participants are defaulted into a target-date fund when they join a plan and are then switched into a managed account product when they reach a certain age or when their account balance hits a certain level. With a personal target-date fund, the fund’s glide path is tailored to the individual based on a variety of data points about them, including not just their age but also their income and non-plan assets. “The idea is that they are improving upon the target-date fund structure to further individualize it for the participant, but in a way that doesn’t require the participant to engage,” Sclafani said.
Many plan participants need some sort of nudge to improve their retirement outlook. Sclafani noted that in a survey it conducted last year, almost half of all participants were saving less than 6 percent of their salary for retirement. When Cerulli asked them what would motivate them to increase their contributions to their 401(k) plan, 72 percent cited “taking full advantage of employer matching contributions.” That was followed by a salary increase or bonus, which was cited by 56 percent of participants.
Although the retirement plan market is growing, Sclafani cautioned that federal legislators seeking to reduce federal deficits may continue to eye the market as a source of revenue by considering legislation that would eliminate the tax deductibility of plan contributions. That “Rothification” idea, which was pulled from the tax reform law passed in late 2017, would remove a strong incentive for workers to participate in retirement savings plans, Sclafani said. By way of evidence, she noted that while about 42 percent of the 401(k) plans Cerulli tracks in a survey with the Spark Institute offer a Roth option, in which contributions aren’t tax-deductible, only about 13 percent of the participants in those plans contribute to a Roth account.
Making sure that retirement plans work as intended is important to plan sponsors, Cimini concluded, asserting that there’s an increasing awareness among sponsors that “having a workforce that can’t retire will eventually affect their bottom line in a negative way.”
Stable Value Carving Out Role in Target-Date Funds
While target-date funds are attracting the lion’s share of new contributions to 401(k) plans, that doesn’t preclude an opportunity for stable value. In addition to the growing number of larger plans that are creating custom target-date funds within their investment lineups that use stable value, many stable value fund providers are using stable value funds in their off-the-shelf target-date fund offerings.