A new report from Cerulli Associates predicts that the 401(k) system will become cash-flow negative by 2016. This carries significant implications as asset managers will be forced to sell equities due to lack of return. In its report, “Evolution of the Retirement Investor 2013”, Cerulli estimates that the 401(k) system experienced an inflow of $300 billion in 2012 and an outflow of $276 billion, with retirees making withdrawals or rolling over funds into IRAs. By 2016, inflows will increase to $364 billion, but outflows will increase at an even greater pace and reach $366 billion, thus surpassing inflows. As individuals begin to roll over their 401(k) funds into IRAs, stock funds could lose out to non-equity funds. With 401(k) funds often having 45-60 percent in equities, as opposed to IRAs which often have 20-35 percent, Amin Rajan, chief executive of Create Research, indicates that funds emphasizing bonds will win out over stock funds.
This recent revelation could prompt a massive shift by pre-retirees to roll their savings over to IRAs. Sue Walton, director at consultant Towers Watson Investment Services, comments on the issue, “People go to the extremes. They get to retirement heavily weighted to equities and they make this shift to go too conservative.” Managing assets in an IRA are often more expensive then securing a 401(k). This may slow down the transition from 401(k)’s to IRAs, predicts Bing Waldert, a director at Cerulli. With a volatile stock market, individuals must be particularly cautious when managing their future.
Tags: 401(k), Amin Rajan, Cerulli Associates, Create Research, equity, ira, retirement, Sue Walton, Towers Watson Investment Services
