Benefits December 13, 2005

EBRI: Fewer Participants Cashing Out Distributions

December 13, 2005 (PLANSPONSOR.com) - Despite many plan sponsors' fear that departing participants will spend their lump-sum distributions, a new study shows a growing number are rolling over those distributions to another retirement savings account.
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A news release from the nonpartisan Employee Benefit Research Institute (EBRI) said fewer participants are spending their distributions.

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This choice can profoundly affect participants’ financial resources in retirement, particularly in the case of young workers, the EBRI study said. For example, a 25-year-old who leaves an employer after accumulating a $5,000 account balance would have about $24,600 at age 65, assuming a constant 4% rate of return compounded monthly.

Other findings included:

  • 43.4% of lump-sum recipients who received their most recent distribution through 2003 placed all of their distributions in a tax-qualified savings plan such as an individual retirement account or another employment-based plan. This was up from 19.3% through 1993.
  • 25.2% of lump-sum recipients who received their most recent distribution through 2003 used any portion of their distribution for new consumption such as buying a home or boat or medical or dental expenses. This was down from 38.3% through 1993.
  • $30,072 was the mean (average) distribution; $8,118 was the median distribution. For the most part, lump-sum distributions were relatively small, with a total of 26.2% amounting to less than $2,500. Another 29% were from $2,500 to $10,000.
  • Two-thirds of the most recent lump-sum distributions took place from 1994-2003. Nearly 60% of those receiving a lump-sum distribution were ages 21 to 40 when they received the distribution.

The report is here .

Administration December 12, 2005

Morningstar to Acquire Ibbotson Associates

December 12, 2005 (PLANSPONSOR.com) - Morningstar, Inc. plans to acquire Ibbotson Associates, a firm best known for its asset allocation services, in a sign that consolidation in the education and advice industry continues.
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According to the announcement, Morningstar is to acquire Ibbotson for $83 million in cash.Ibbotson will bring approximately 70,000 advisor clients and 700 institutional clients to Morningstar for a total of more than 210,000 advisors and 1,200 institutions, in addition to Morningstar’s more than four million individual clients.

The Business of Advice

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Currently Ibbotson has approximately $3.5 billion in assets under management for participants in 401(k) and other defined contribution plans and manages assets for several major retirement plan providers, according to the announcement.   Morningstar has $225.9 million in assets under management for retirement accounts, and provides a suite of retirement planning services through approximately 69,000 plan sponsors and 30 plan providers for approximately 12 million retirement plan participants.

Joe Mansueto, chairman and chief executive officer of Morningstar, told PLANSPONSOR, “Asset allocation plus security selection equals better advice for investors.   Marrying [Ibbotson’s] asset allocation engine with our selection capabilities will provide better advice for investors.”

Mansueto said that he believes the key in the advisor business for retirement plans is to have a broad-based solution for different participant needs.   While some participants are very comfortable with managing their own accounts, others want a professional to manage their accounts for them, so a dual-pronged effort of an online tool and outsourced advisor meet both needs.   Ibbotson was an early leader in providing this combination, he said.

In addition, Ibbotson’s managed retirement accounts are hosted by the provider, while Morningstar hosts theirs.   Mansueto says the acquisition will enable Morningstar to provide both types of solutions for clients.

Finally, Mansueto told PLANSPONSOR that Ibbotson is involved in putting hedge fund of funds together, so the acquisition will introduce Morningstar to that emerging market.   Meanwhile, he said Morningstar is optimistic about expanding Ibbotson products into overseas institutional markets.

Results of the Deal

Ibbotson’s major product lines are investment consulting and research, planning and analysis software, investment advice, educational and marketing services, and a line of presentation materials.   An integration team will review both companies’ product lines to determine product-level marketing plans, according to a Q & A on Morningstar’s Web page.  

Morningstar plans to keep Ibbotson’s name.   Mansueto said Ibbotson is a well respected brand and “represents the industry standard when it comes to asset allocation.”

Roger Ibbotson, the firm’s founder, and Mike Henkel, President of Ibbotson, plan to stay with Morningstar.   Morningstar said in its Q&A that decisions concerning the 1,120 Morningstar staff and 150 Ibbotson personnel will be made as the integration team concludes its work.

PLANSPONSOR’s 2005 Advice Buyer’s Guide results on Ibbotson can be found  here .  Results for Morningstar can be found  here .  

A fact sheet and Q & A can be found  here .  

The acquisition, Morningstar’s largest to date, is expected to close in the first quarter of 2006.

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