Defined contribution (DC) plans such as 401(k)s and 403(b)s have been growing rapidly due to government mandates and tax incentives, accumulating $11.3 trillion as of June 30, 2024, according to the Investment Company Institute (ICI). However, individual retirement accounts (IRAs) have become even larger, with $14.5 trillion in assets, benefiting from unique advantages. Assets often are transferred from DC plans to IRAs, where there is typically less fiduciary oversight, particularly if the Department of Labor (DOL) rule is vacated. Moreover, IRA investors have a wider range of choices and access to more engaged financial advisors.
The competition for IRA rollovers has intensified as retirement plan advisors (RPAs), wealth advisors and recordkeepers vie for the same assets. Wealth advisors have long viewed IRA rollovers as a significant business opportunity, with nearly $1 trillion moving out of DC plans annually over the past three years, according to Cerulli Associates.
While some RPAs concentrate on capturing rollovers, others see them as a waning revenue opportunity. Innovations in fintech that enable wealth advisors to manage clients’ DC accounts, in-plan retirement income options, and the DOL auto-transfer rule under the Portability Service Network—a consortium of the six largest DC recordkeepers—are expected to facilitate plan-to-plan transfers. This shift suggests a potential change in the IRA rollover landscape; but will rollovers diminish or just evolve?
Cerulli’s data indicates that 63.5% of rollovers were directed to advisors last year, up from 57% in 2021, while established advisor relationships captured 84.6% of these assets in 2023 (slightly down from previous years). Advisors are particularly adept at capturing rollovers with balances above $200,000. Self-directed IRAs accounted for 28.4% of assets in 2023, down from 34.5% in 2021, with average balances decreasing from $120,800 to $110,300. Meanwhile, plan-to-plan transfers remain the smallest segment, accounting for about 8% of the market over the past three years.
Despite rollovers being a common path to wealth and retirement convergence, some RPAs question their profitability. Cerulli’s data suggests that larger rollover assets typically flow to advisors with established client relationships, prompting RPAs to consider how they can leverage their position to build relationships with plan participants—particularly wealthier ones—and capture assets when rollovers occur.
The evolution of institutional IRA platforms within DC plans reflects ongoing changes in this space. As in-plan retirement income options gain popularity, especially those embedded in target date funds and managed accounts, they may dissuade rollovers if equivalent investments are not available outside the plan.
As wealth and retirement services converge, RPAs are increasingly focused on forming early connections with plan participants, particularly HENRYs (“high earners, not rich yet”). However, identifying potential wealth clients can be challenging: Many participants with modest account balances may hold significant assets elsewhere. High-income employees and financially savvy participants using health savings accounts are prime targets for advisors, though much of plan participants’ wealth is not immediately visible, making access to both internal and external data crucial.
Marketing and brand awareness are vital in this competitive landscape. Although recordkeepers seem to have an advantage, as their names appear on participant websites and statements, research by the Defined Contribution Institutional Investment Association reveals that many participants do not know their recordkeeper’s name, posing an even greater challenge for RPAs striving to increase engagement.
And as in many aspects of our lives, artificial intelligence could significantly influence how advisors provide advice at scale, potentially affecting IRA rollovers.
The battle over IRA rollovers introduces potential friction between advisors and recordkeepers regarding participant interaction and collaboration, posing an ongoing challenge in an increasingly competitive environment.
