Over my last several blog posts, I have been detailing the ancillary revenue sources that have allowed retirement plan recordkeepers to continue to compress plan administrative expenses.
- Proprietary investment management
- Managed accounts
- IRA rollovers
- Cross-selling retail financial products
In this post, I’ll cover the third of the five sources, IRA rollovers.
According to the Investment Company Institute (ICI), as of March 31, 2018, IRA accounts accounted for more than $9.1 trillion in retirement assets.  In fact, IRA assets exceed those in qualified plans by more than $1.4 trillion. While some of the $9.1 trillion was made through individual annual retirement contributions, the majority were sums raised in qualified retirement plans and later rolled out into IRA accounts.
The oldest of the baby-boom generation hit age 65 back in 2011 and the growth of the IRA marketplace has been notable as they have begun the retirement process. IRA assets have increased by 82% since the end of 2010, defined contribution plans have only increased by 61% during that same period.
The institutional retirement plan marketplace has become more transparent and less expensive over the last decade. The Department of Labor (DOL) has helped plan sponsors better understand expenses, and sponsors have increasingly gone away from using the proprietary investments of their recordkeeping providers. The IRA marketplace hasn’t benefited from similar efficiencies or transparencies.
In fact, the DOL’s fiduciary rule, which was intended to increase the liability for those encouraging participants to roll out of qualified retirement plans died a quiet death in the federal courts earlier this year.
While the SEC continues to work on increasing scrutiny related to sales practices, IRA accounts and participants continue to end up with investment products that are frequently more expensive, less independent, and less efficient than those that were available in qualified plans.
The recordkeepers that serve plan participants are aware of how effective inertia is in driving behavior. The same behavioral finance biases that make automatic enrollment and auto escalation effective, also work in convincing participants to roll money out of retirement plans. Messaging to participants frequently addresses the individual ownership of IRAs in helping participants decide what to do when they leave employment.
The most successful providers may expect to capture 50% or more of IRA activity out of client plans.
Back in 2013, The General Accountability Office (GAO) issued a report that recommended the DOL and IRS:
- Issue clarification of the circumstances that will cause a service provider who assists participants with their distribution decisions to be an ERISA fiduciary;
- Require service providers to clearly disclose their financial interests in participant decisions
- Require plan sponsors to provide a summary to a separating participant of his or her options and the key factors that the participant may wish to consider in comparing options
With the death of the fiduciary rule, we are unfortunately no closer to addressing the recommendations of the GAO.
Monitoring the activity of your providers continues to be wise, and while not required by the DOL, providing participants with information on their options at the separation of service (as recommended by the GAO) may help them make more informed decisions regarding a high impact decision.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.
Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.