Confluence of Events Might Affect Plan Size

Retirement plan sponsors should keep an eye on asset flows to maintain purchasing power and understand participant needs.

Retirement plan sponsors are navigating several coalesced challenges that are related and might impact their plans—spiking inflation, market volatility, the potential for large portions of assets leaving the plan due to the so-called “Great Resignation,” as well as the growing number of Baby Boomers entering retirement.

Participants’ swelling account balances from stock market gains in previous years might have masked the urgency for plan sponsors to fortify their plans against the potential for asset losses. The time to act is now, an industry expert says.

“While not well publicized, there is now, and has been for several years, more money being distributed from plans than being contributed to plans,” says Fred Reish, a partner and chairman of the Financial Services ERISA Team at Faegre Drinker. “That is not obvious because of the significant stock market gains over the past decade. But someday the market will go down, and that dynamic will be exposed.”

Bracing for Exodus

There are other consequences beyond the plan getting smaller when assets exit, explains Katie Hockenmaier, U.S. defined contribution research director, at Mercer. Larger plans have greater buying power and can negotiate lower costs with asset managers and recordkeepers.

“If you see really significant outflows, you could cease qualifying for certain share classes or fee arrangements or vehicles,” Hockenmaier says. “It may also impact their recordkeeping relationship—if they see a certain number of participants or a certain amount of assets pull out of the plan— that could impact the overall fees that they may be paying or passing on to participants.”

Plan size can impact services as “some recordkeepers have tranches of servicing for certain sized clients and that may effectively demote them to a lower group,” she explains.

It’s too early to arrive at any grand conclusions on plan asset impacts from historic COVID-19 workforce and economic dislocations, and the more recent inflation and stock market declines, says Hockenmaier. However, she notes that some manufacturing and technology sector plan sponsors are in a position of asset outflow.

“There is a portion of the industry that is in that position. I would not say quite yet the majority of defined contribution plans, but there are a number of plan sponsors in that situation,” Hockenmaier says. “They tend to be concentrated in certain industries that may be starting to downsize.”

Hockenmaier, who adds that she has not seen significant impacts to plans from the Great Resignation, says she will track several data points to study the trends of assets leaving plans, including any change in the number of participants in a plan quarter over quarter, asset flows, and rollover activity. “When we get to the end of ‘22 it will really be much easier—even midway through this year—to see what impact is being made to plans,” she says.


Tracking asset flows can inform retirement plan sponsors of any challenges they might have, says Alexa Nerdrum, managing director, retirement, at Willis Towers Watson. “One thing we are seeing is that the pandemic really didn’t lead to some of the mass distributions plan sponsors and others were expecting,” she says.

An estimated 2% to 4% of participants made retirement account withdrawals after passage of the Coronavirus Aid, Relief, and Economic Security—or CARES—Act provided for special distribution and loan rules for retirement plans and individual retirement accounts, according to Nerdrum. Meanwhile, savings rates and plan balances have continued to grow, she says.

To keep assets in plan, encourage savings and attract talent, plan sponsors have bolstered plan design features—adding lifetime income options and the ability to repay student loans and save for emergencies. Plan sponsors are shifting their focus, as “attraction and retention has become a significant issue of late for a lot of plan sponsors, [and] a lot of our clients,” Nerdrum explains.

Plan sponsors can use data on what groups of individuals take loans and hardship withdrawals, and who is maximizing or not maximizing their deferrals, to know what plan design features will meet participants’ needs, Nerdrum says.