The Millennial Rollover Opportunity. Exploring the Factors That Motivate Younger Investors to Roll Over Assets

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1 The Millennial Rollover Opportunity Exploring the Factors That Motivate Younger Investors to Roll Over Assets

2 Table of Contents Introduction...1 Key Findings Finding Rollover Opportunity Attracting Rollover Dollars and Retaining Assets Strategic Implications...4 Methodology...6 Copyright 2015 by Market Strategies International. All rights reserved. Reproduction of any part of this report is illegal under Federal Copyright law (17 USC 10 et seq.) and is prohibited. Photocopying or transmission of the information in any electronic or mechanical fashion outside of the purchasing organization is strictly forbidden, unless the user has purchased an annual usage license from Market Strategies International that allows the user the capability to quote directly from the content with attribution to the firm. This report is intended exclusively for distribution within the purchasing firm. Distribution to or use by any other firm, subsidiary, affiliate, external agent or client is prohibited. Contact Market Strategies International to learn more about redistribution/attribution permissions. Analysis relies on data from primary research and third-party sources deemed to be reliable. Although believed to be accurate, this information is not guaranteed. Publication date: October 2015

3 Introduction With over $300 billion in assets projected to be rolled over to IRAs in 2015, it s more important than ever for IRA providers to both understand the factors that motivate investors to take action and target the right investors in the right way to maximize business growth potential. While it has long been believed that inertia is the main barrier to capturing rollover funds, recent research from our DC Participant Planscape report tells a different story. This white paper outlines the best type of investors to target, identifies what investors look for in an IRA provider and follows up with some strategic points for IRA providers. Insights shared in this white paper are derived from our DC Participant Planscape report. The full report provides an in-depth look at the defined contribution (DC) participant experience and benchmarks the top plan providers using critical participant satisfaction measures. Examining the attitudes and perceptions that inform and define participant behavior, the study will help subscribers maximize participant contribution and engagement levels, leverage cross-sell opportunities and access rollover dollars. DC Participant Planscape Maximize Participant Contribution and Engagement, Leverage Cross-Sell Opportunities and Access Rollover Dollars August 2015 SOURCE: DC PARTICIPANT PLANSCAPE. AUGUST

4 Key Findings Finding Rollover Opportunity Employer-sponsored retirement plans (ESRPs) make up the lion s share of participant portfolios across all generations, with an average allocation of 42% and an average balance of $144,000 in assets residing in these accounts. IRAs are the next widely used, with an average allocation of 21%. A closer look at the asset distribution to IRAs more closely, however, uncovers disparity between generations. As you may expect, as participants age, their proportion of IRA dollars grows. One-quarter of 1st Wave and Silent portfolios are comprised of IRA assets, at 25% and 23%, respectively. As Millennial and Gen X participants currently allocate only 12% and 17% of total assets to these products, respectively, they represent the greatest opportunity for growth in this category. EXHIBIT 1 The reason for this is simple. As a result of early-career exploration and job switching, younger investors Millennials and Gen Xers have accrued a sizable balance in ESRPs. In fact, these younger participants are more likely to hold assets in both a current and a former employer s plan, suggesting that they are apt to have greater interest in consolidating and rolling over their assets to an IRA in the future. EXHIBIT 2 Taking a closer look at former-plan accounts, we find that participants maintain an average of 1.7 accounts in former employers plans. As younger generations are less settled in their careers and more apt to move from position to position, Millennials and Gen Xers are carrying the greatest number of former plan accounts. Millennials have an average of 2.4 former plans while Gen Xers have an average of 1.5. Again, this speaks to the vast opportunity rollover IRA providers have in terms of targeting younger participants. EXHIBIT 3 Millennial and Gen X participants allocate only 12% and 17% of total assets to IRAs, respectively, making them the greatest opportunity for growth in this category. EXHIBIT 1 DISTRIBUTION OF INVESTABLE ASSETS College savings accounts 2% Bank accounts 10% Other 6% ESRPs 42% Taxable brokerage accounts 19% IRAs 21% Base: All plan participants 2 THE MILLENNIAL ROLLOVER OPPORTUNITY

5 EXHIBIT 2 PLAN PARTICIPANT PROFILE Current plan only participants n=2,642 Current & former plan participants n=888 Former plan only participants n=1,108 Millennial 18% 37% 13 11% Gen X 38% 13 32% % 2 nd Wave 24% 19% % st Wave 16% 13 10% 13 33% 13 Silent 3% 13 1% 13 37% 13 Base: All plan participants p/q = Significant change from stated year / = Significant change observed in 2014 sustained in 2015 EXHIBIT 3 NUMBER OF FORMER PLANS Total Millennial Gen X 2 nd Wave 1 st Wave Silent 1 70% 13 53% 13 74% 76% 76% 13 78% 2 19% 22% 17% 19% 18% 18% 3 5% 13 6% 5% 4% 4% 4% 4 1% 3% 1% 14 <1% 1% <1% 5 2% 13 6% 1% <1% 1% 0% 6 or more 3% 13 10% 13 1% 14 1% <1% 1% MEAN Base: Former plan participants p/q = Significant change from stated year / = Significant change observed in 2014 sustained in 2015 SOURCE: DC PARTICIPANT PLANSCAPE. AUGUST

6 Attracting Rollover Dollars and Retaining Plan Assets Understanding the factors that drive participant satisfaction and consideration of providers is an integral component in developing strategies to capture and retain rollover dollars. In a somewhat concerning finding, participants report lower satisfaction with their plan providers overall compared to a year ago. Yet interestingly, participants are generally more satisfied with their former plan providers, revealing a potential opportunity for providers of former plan participants to attract available rollover assets into an IRA or continue to keep those assets in the plan. EXHIBIT 4 Knowing that satisfaction levels may be waning, it is important to understand the key criteria participants are looking for in a rollover IRA provider. To that end, we asked all participants with assets in a former plan to identify the top 5 out of 17 criteria that they would use in choosing a rollover IRA provider. Low fees and expenses, financial stability and investment performance were selected most often, and were most likely to be ranked first. While the criterion of fees and expenses tops the list across all age cohorts, trustworthiness comes into play for Gen X and s, while the oldest cohorts, presumably with more imminent retirement-planning needs focus on service and support. EXHIBIT 5 The real challenge, however, is motivating participants to move their assets. Until now, there was a prevailing belief in the industry that inertia is the main reason why participants don t roll assets out of a former plan when they change jobs or retire. To gain clarity, this year we asked participants why they decided to leave these assets in a former plan and the results may be surprising. In many instances, when participants leave assets in a former employer s plan, they are making a conscious choice. They re happy with the investment performance and the choice of investment options and, therefore, they don t see the need to move. It is interesting to note that these sentiments are stronger among the older generations, reinforcing the fact that the best rollover opportunities lie among Millennial and Gen X investors. EXHIBIT 6 Strategic Implications There is little doubt that the rollover opportunity is growing within the younger generations. As these participants continue to explore and advance their careers, they not only begin to amass more wealth, but also carry around greater numbers of former-employer plans. Attracting these participants becomes crucial for providers that not only wish to retain current assets but also gain rollover dollars. While the industry has long believed that lack of inertia is what s causing participants to retain former plans, our research shows that there s more to the story. Although investment performance is a top factor for leaving assets in former plans across all the generations, Millennial and Gen X participants are less tied to this sentiment and, therefore, are more-receptive targets for rollover accounts. Competitive fees and strong investment performance are key table-stake expectations among these rollover prospects. Beyond these factors, firms can differentiate themselves by offering an easy rollover process and strong service and support ultimately becoming a trusted partner for these younger investors to rely upon for their retirement planning needs. EXHIBIT 4 OVERALL SATISFACTION WITH PLAN PROVIDER Not at all satisfied 0 3 (Bottom 4-box) 4 7 (Mid 4-box) Extremely satisfied 8 10 (Top 3-box) Industry average: Current Provider 3% 45% 51% 14 Industry average: Former Provider 4% 14 30% 14 66% 14 Base: All plan participants 4 THE MILLENNIAL ROLLOVER OPPORTUNITY

7 EXHIBIT 5 TOP CRITERIA FOR SELECTING A ROLLOVER IRA PROVIDER Ranked #1 Ranked #1 5 Millennial Gen X 2 nd Wave 1 st Wave Silent Gen Low fees and expenses 13% 55% 44% 53% 64% 61% 64% Financial stability 13% 51% 40% 48% 50% 60% 68% Investment performance 11% 48% 32% 47% 59% 55% 57% It s a brand I trust 10% 42% 38% 43% 46% 46% 39% Service and support 6% 40% 35% 38% 37% 44% 50% Easy rollover process 5% 35% 31% 37% 40% 33% 34% Range of investment options 3% 31% 26% 29% 36% 35% 33% Brand reputation 5% 29% 32% 29% 26% 32% 22% It s my current plan provider 9% 29% 31% 28% 25% 24% 35% Retirement planning guidance/advice 4% 25% 27% 29% 23% 22% 22% Key 14% 15% to 28% 29% to 41% 42% to 55% 56% Base: Former plan participants Low High EXHIBIT 6 REASONS FOR LEAVING ASSETS IN A FORMER PLAN Total Millennial Gen X 2 nd Wave 1 st Wave Silent Gen I m happy with the investment performance of my former plan I like the choice of investment options in my former plan I don t plan to take any action with my former plan assets until I need to My former plan has lower fees than other options I ve researched My financial advisor recommended it 35% 29% 28% 15% 13% 22% 28% 40% 46% 53% 30% 28% 29% 30% 31% 19% 23% 32% 35% 39% 17% 8% 11% 17% 21% 19% 11% 7% 9% 15% I haven t had a chance to move the assets yet My former plan has payout options that I can use for income when I retire I would incur a fee (or surrender charge) if I move the assets 12% 9% 6% 13% 17% 14% 9% 2% 10% 3% 9% 13% 16% 9% 7% 5% 3% 5% Key 12% 13% to 22% 23% to 33% 34% to 43% 44% Base: Former plan participants Low High SOURCE: DC PARTICIPANT PLANSCAPE. AUGUST

8 Methodology This research paper is derived from an online survey of a representative cross section of 4,638 defined contribution plan participants with a current or former plan in July Survey participants were required to be 18 years or older, contribute at least 1% to a current plan, and/or have $5,000 or more in at least one former plan. Linda York Vice President, Syndicated Research & Consulting For more information, contact us at cogent-reports@marketstrategies.com or About Market Strategies International Market Strategies International is a market research consultancy with deep expertise in consumer/retail, energy, financial services, healthcare, technology and telecommunications. The firm is ISO certified, reflecting its commitment to providing intelligent research, designed to the highest levels of accuracy, with meaningful results that help companies make confident business decisions. Market Strategies conducts qualitative and quantitative research in 75 countries, and its specialties include brand, communications, customer experience, product development, segmentation and syndicated. Its syndicated products, known as Cogent Reports, help clients understand the market environment, explore industry trends and evaluate and monitor their brand and products within the competitive landscape. Founded in 1989, Market Strategies is one of the largest market research firms in the world, with offices in the US, Canada and China. Visit us: cogent-reports.com Read our blog: freshmr.com