401(k) Outflows: How Financial Advisors Will Adjust (TROW, FNGN)

For years balances in 401(k) plans continued to grow fueled in large part by Baby Boomers saving for retirement. This is shifting; according to a recent article in The Wall Street Journal net outflows from tax-deferred retirement plans were $11.4 billion in 2013, the most recent year for which data is available. The article goes on to say that this trend of net withdrawals is expected to accelerate over the rest of this decade as Baby Boomers continue to retire and move on into their retirement years. This will certainly have implications for financial advisors who provide advice to retirement plan sponsors as well as money management firms who manage the investment assets inside of these plans.

Opportunity for Financial Advisors

For financial advisors who provide advice to individuals (versus to retirement plans) the opportunity comes in the form a gathering assets from these Baby Boomers as they retire and roll their retirement plan balances over to individual retirement accounts (IRAs). Besides the obvious opportunities to gather assets, many of these retirees will need financial planning advice and perhaps will need guidance in purchasing annuities and long-term care insurance. Estate planning can also be a major focus at this point in time. (For more, see: Helping Clients Choose Long-Term Care Insurance.)

Many of these Boomers are affluent and make great clients. As many advisors already know a prime time frame to connect with these potential clients is within 10 years of retirement. This allows you to build a relationship with them, help them plan their retirement strategies and then become the logical advisor to guide them into and through their retirement years.

Impact on 401(k) Advisors

The impact on financial advisors and investment consultants who provide advice to 401(k) plan sponsors is hard to predict but I suspect it will be minimal. Certainly those advisors who are compensated all or in part as a percentage of the plan’s assets could be impacted. Others who charge a flat retainer likely would see no impact. (For more, see: Fiduciary Designations for Financial Advisors.)

However with the whole debate about a fiduciary standard for retirement plan advisors and the emphasis on the fiduciary responsibility of plan sponsors the demand for advice from qualified advisors and consultants is high. Let’s face it, most plan sponsors would rather spend their time and mental energy running their business versus worrying about fiduciary and investment issues. 

Impact on Money Managers   

The impact on firms who manage the investments offered in 401(k) plans could be significant. We are referring to the mutual funds, collective investment trusts, exchange-traded funds (ETFs), insurance products, stable value funds and other investment vehicles used across the 401(k) landscape. Asset managers are generally compensated as a percentage of the assets in their fund. So all things being equal their earnings would drop. Add to this the downward pressure in recent years on 401(k) plan costs in general and investment expenses in particular and you have a situation that could result in a drop in revenues for many money managers. (For more, see: 401(k) Risks Advisors Should Know About.)

T. Rowe Price Group Inc. (TROW), Fidelity Investments and Vanguard are all major mutual fund firms who are big players in the 401(k) market. All three offer a full range of mutual funds and other investment vehicles as well as a full range of account options for individual investors. In the The Wall Street Journal piece referenced above, Scott David of T. Rowe Price said “…the key to offsetting outflows from retirement plans is to move older workers into different products at the firm.” Big players such as Fidelity and Vanguard take a similar approach. David went on to say: “Their distribution from a 401(k) plan just means they’re entering a different part of their life,” he says. “They still have investment needs, but their investment needs will change a bit.”

Any pain among money managers is more apt to be felt by firms who are investment only — in other words firms that only manage money and don’t offer an integrated platform of account and investment services for clients. (For more, see: How to Include ETFs in a Client's 401(k).)

The Next Generation

Much has been written about the financial impact of the Millennials. Many money managers are looking to this generation of retirement savers to offset the retirement plan outflows from the Baby Boomers in coming years. While it will take at least a few years for their savings rate to really ramp up, the sheer size of this group could make them an even bigger force in the retirement plan space than the Baby Boomers.

The opportunity is for financial advisors and retirement plan providers to provide this group with the tools they need to get on track with their retirement savings in a fashion that will show them the value of doing this. Millennials tend to be very tech savvy and gravitate toward online tools. For example they are big users of robo-advisors and to the extent tools of this sort are available in the 401(k) space this will help woo Millennials. Though not a new player, Financial Engines Inc. (FNGN) is one of the largest robo-advisors and its main focus is 401(k) participants. (For more, see: A Financial Advisor's Guide to Millennial Clients.)

The Bottom Line

Since their inception over 30 years ago the growth in assets in 401(k) plans has been fueled by the huge Baby Boomer generation. Besides their sheer size this was the first generation of retirement savers who were forced to fund their own retirements as traditional defined benefit pension plans have largely gone by the wayside, at least in the private sector. The trend in the growth of assets in 401(k) plans has shifted and as Baby Boomers retire we now see a net outflow in assets from tax-deferred retirement plans. This will create potential opportunities for savvy financial advisors and for full-service financial services firms to work with these plan participants as they move into retirement. Those who can serve their needs stand to profit from this trend. (For more, see: Financial Planners: Specialize in Seniors.)