Markets, Retirement

401(k) Withdrawals To Accelerate As More Boomers Retire

6/18/15 1:30 PM

Baby boomers (Americans born between the years 1946 and 1964) make up a very large portion of both the general population and the workforce. As a result, the effects on the economy have been substantial as more members of this generation reach the age of retirement. For example, retiring boomers exiting the workforce have helped push the labor force participation rate down to multi-decade lows, something that’s contributed to the sharp decline in the government’s official measures of unemployment. Further, small business sales have been on the rise recently thanks to the growing number of boomer business owners selling their companies to help fund retirement. Similarly, withdrawals from 401(k) plans are now starting to exceed new contributions as more and more baby boomers retire, according to a study out this week from BrightScope and the Wall Street Journal. Specifically, a net of $11.4 billion was pulled from these savings plans in 2013, the first contraction in decades. This trend should continue as more baby boomers exit the workforce and although it may provide a temporary boost to tax receipts for the U.S. government, it could also have a significant effect on the retirement industry. From the study:

Baby boomers were the first generation to rely heavily on the savings plans and helped create a multitrillion-dollar industry. … Now the 401(k) generation is ready to take its money out as the number of Americans reaching retirement age this year is expected to hit 3.5 million, up from 2.7 million in 2010, according to J.P. Morgan Chase and Census Bureau data. … In the past four years, investors pulled a net $12.8 billion from the top 25 plans by assets, according to BrightScope. … Estimates vary on how long the 401(k) net outflows will last and how severe they will become. Financial-services research firm Cerulli Associates projects outflows will persist at least until 2019 when investors will pull an estimated $51.6 billion. J.P. Morgan predicted in its April note the trend will last through 2030, with outflows peaking at $40 billion in 2019.
Some money managers are banking on another demographic group to reverse this shift: millennials. But they acknowledge that will require some convincing. “Millennials haven’t moved into a higher savings rate yet,” said Douglas Fisher, Fidelity Investment’s head of policy development on workplace retirement. “We need to start getting them to the right level,” he said. But even if millennials boost their savings, it will take some time for asset managers to see the benefits, said Ken Worthington of J.P. Morgan. “Redemptions in the industry are actually going to get worse for the next four to five years,” he said.



Sources: Calculated Risk, BrightScope, Wall Street Journal

Post author: Charles Couch