Comment: Getting-And Keeping-Retirement Assets
Roggenkamp, Cynthia J., American Banker
The opportunities for banks in the retirement market are better than ever, spurred by legislative changes such as the Roth IRA and demographics such as the aging baby boomer population.
Pension portability and job market fluidity are also playing a role in making the market more attractive.
With vast amounts of money piling up in 401(k) and other retirement vehicles, there has never been a better time for banks to refocus attention on their asset acquisition and retention strategies.
However, as competition for retirement plan assets increases, banks must take a more holistic, consultative approach to meeting their customers' retirement planning needs.
This includes offering a comprehensive program of retirement savings information, options, and tools, as well as leveraging technology to simplify applications and transactions for customers.
According to a Social Security Administration report last year, the number of people older than 65 is expected to double in the next 30 years.
Realizing that the Social Security Trust Fund is in danger of depletion, baby boomers are getting a wake-up call about the need to bolster retirement saving.
As this group approaches and enters retirement, the demand for information, planning tools, and IRA products will exert a profound effect on the retirement services industry.
Americans are becoming responsible for their own retirement funding. In recent years defined-contribution plans such as 401(k) plans have soared in popularity, with more than 600,000 available today, and the more traditional defined-benefit plans have shrunk to fewer than 100,000.
This tremendous shift in the way Americans fund their retirements is especially evident since an ever-increasing percentage of lump sum distributions is giving more control over retirement funds.
From 1989 to 1994 the number of lump-sum distribution recipients grew 50%, to 9.1 million, according to Department of Labor statistics. And the trend is continuing.
The average amount of these distributions is considerable. In 1997 lump sum pension payouts averaged $22,230 for people changing jobs and $119,200 for retirees, according to Limra International.
Because IRAs are the natural heirs to these lump sum distributions, IRA providers stand to reap huge benefits.
Members of Congress from both parties are introducing legislation to help Americans save more for retirement.
Half a dozen bills are in the works, including measures that would increase annual contribution limits to $5,000, from $2,000, for individual retirement accounts and to $15,000, from $10,000, for 401(k)s. A "Roth 401(k)" has been proposed, and the administration has its own plan for helping low- and middle-income Americans increase retirement assets.
Taken together, these trends paint a picture of tremendous potential.
However, retaining retirement assets over the long term has proven challenging for banks. This is especially true in the case of assets acquired through defined-contribution plans such as 401(k) plans.
Some industry experts estimate that many financial institutions are retaining less than 20% of the assets acquired through 401(k) plans when plan participants become eligible for lump sum distributions.
Why are lump sum recipients taking their distributions elsewhere? And where is the money going?
In many cases, the retirement assets are lost simply because the customer is not aware of the bank's retail offerings or has not been asked to use them. …