The U.S. retirement planning industry has reached an important inflection point in early 2023, according to Brian Severin, senior executive vice president and chief marketing officer at Mutual of America.
Thanks to the interplay of a number of complicated causes, including high-level demographic trends and fast-moving legislative developments, individual retirement accounts could soon see total flows turn negative. This would represent a significant turn of events after decades of strong inflows for IRAs, Severin tells ThinkAdvisor, and financial planning professionals should take note.
"Your readers may be surprised to hear it, but we are actually now just starting to see net outflows from IRAs," Severin says. "This is happening as the baby boomers age and look to pass on wealth, and it's also driven by the fact that costs within institutional retirement plans have been driven down."
To be clear, it will be a long time before the IRA marketplace ceases to be a dominant destination for Americans' accumulated retirement wealth. According to a recent analysis from Cerulli, IRA balances are coming off of an impressive run over the past five years, reaching nearly $14 trillion in total assets as of the end of 2021.
"For a long time, the IRA rollover was just a no-brainer," Severin says. "Now, however, we are seeing a lot more account consolidation beginning to occur within workplace retirement plans, thanks to lower costs and the emergence of more sophisticated income vehicles. I am confident that we can expect this trend to accelerate in the years ahead."
Cerulli's analysis posits that the overall growth in the 401(k) and 401(b) plan markets could further bolster IRA rollovers in the future, but Severin says that assumption is set to be put to the test, and he won't be surprised if defined contribution plans eventually begin to outshine IRAs as the retirement spending vehicle of choice.
IRAs, 401(k)s Both Coming Off a Disruptive Year
Echoing the sentiments of many other financial services professionals, Severin says 2022 was one of the most challenging and disruptive years on record.
"On the one hand, the rapidly rising interest rate environment is something we hadn't really seen before, and it spooked a lot of people and caused bond prices to fall," Severin recalls. "When you couple that with the fact that equity asset valuations fell by double digits, it was a really difficult year for people. We spent a lot of time in 2022 emphasizing the importance of patience and a long-term perspective."
Severin says his gut feeling is that a shallow recession is in the cards for mid- or late 2023, and as such, he expects that interest rates are set to stabilize or even "creep down" by early 2024. This would help the economy from a macro perspective, Severin says, but the current interest rate environment actually presents attractive opportunities for retirees and those seeking to earn a decent return without taking excessive risk.
"From a longer-term historical perspective, the current benchmark rate being in the realm of 5% actually represents a more normal environment than what we have experienced for at least a decade," Severin says. "I think that fact has been hard for people to digest, simply because we got here so fast. While the high inflation rate still hurts, people finally have a good opportunity to get safe, strong returns."
