Assets in individual retirement accounts are likely to grow to almost twice the amount held in 401(k) plans over the next five years, according to an industry analyst.
IRA assets are projected to swell to $12.6 trillion by the end of 2022, according to Jessica Sclafani, director of the retirement practice at research firm Cerulli Associates. That's up from $9.2 trillion at the end of 2017. By contrast, 401(k) assets in the U.S. are estimated to hit $6.6 trillion by 2022 — an increase from $5.3 trillion last year.
Rollovers from 401(k) plans to retail retirement accounts is a large reason for this growth dynamic, said Ms. Sclafani, who spoke Monday at the Kohler Retirement Plan Advisor Conference in Kohler, Wis.
Contributions to IRAs — due mainly to rollovers — have exceeded distributions from these retail accounts in recent years, meaning IRAs have been growing on an organic basis. Meanwhile, this hasn't been true for 401(k)s: Distributions have exceeded contributions in some recent years, such as 2014 and 2015, signaling negative net flows. Instead, market performance has been the primary growth driver in 401(k) plans.
"The 401(k) market is in a somewhat precarious position," Ms. Sclafani said. "It's reliant on capital market returns for future asset growth."
Around 96% of the $2 trillion in total IRA contributions between 2012 and 2017 year is due to rollovers from defined-contribution plans. The IRA market experienced net flows of about $580 billion in this time period.
That trajectory has been consistent, and Cerulli expects it to continue.
The good news for retirement plan advisers: The lion's share — 55% — of that $430 billion in flows came from an existing adviser relationship, while 6% came from a new adviser relationship, Ms. Sclafani said.
Meanwhile, of the money eligible to be rolled over that didn't go into an IRA, 69% stayed in the participant's employer-sponsored retirement plan, 5% of assets were cashed out and a paltry 0.2% was rolled into another DC plan.
Money has been consistently rolling out of DC plans into IRAs partly because of the lack of flexibility in workplace plans with distributions, Ms. Sclafani said. Most DC plans don't allow for ad hoc withdrawals, which forces participants to seek more flexible account types.
"It's hard to think about the DC plan as a retirement-income platform retaining the assets of retired participants, when they generally don't have regular access [to their money]," Ms. Sclafani said. "So they need to roll over."
IRAs became the largest segment of the U.S. retirement market in 2013, beating out defined-contribution and traditional pension plans. Over the decade between 2006-16, IRAs notched the largest compound annual growth rate — 6.7% — compared with 5.2% for DC plans and 1.6% for pensions, Ms. Sclafani said.