US 401ks may be facing negative cash flows in two years

That’s the conclusion of a study by consultant Cerulli Associates reported earlier this month in the Financial Times.    

In 2016, Cerulli estimates inflows from plan participants will be $364 billion; withdrawals by retiring workers will amount to $366 billion.  And the negative cash flow gap widens from there.  This doesn’t mean that aggregate 401k assets will decline precipitously, or even decline at all for a while.  Presumably appreciation of assets in the system, now at about $3.5 trillion, will more than offset net withdrawals for a long while. Still, this marks another milestone in the waning of the wealth and influence of the Baby Boom.

Most often, 401k withdrawals find themselves rolled over into IRAs, which now amount in total to about $5.4 trillion, according tothe FT.  Despite the inflow of refugee 401k money, however, the IRA market isn’t a picture of health, either.  It’s possible that the overall defined contribution market (401ks + IRAs) will turn cash flow negative by the end of this decade.

Although some retirees may be permitted to remain in the company 401k plan, most opt for the greater flexibility, arguably more favorable tax treatment and wider universe of choice afforded by IRAs.  When they do so, they apparently go from reasonable asset allocations of 45% -60% stocks, with the rest in fixed income, into a conservative shell, with 65% – 80% in bonds. It’s not clear whether this has always been the case, or whether current behavior is a PTS reaction to the financial collapse of 2008-09.  It may also be that IRA holders need that large an allocation to bonds just to generate a reasonable amount of income.

The net result of all of this is that pension saving is gradually turning from being a mild net positive for stocks into a mild net negative.

My take from this is that it’s one more reason for turning one’s attention away from the Baby Boom and toward Millennials in trying to figure out retail investors’ influence on the stock market.

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