March 2010

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Catch-Up Game in Shadow Retirement Market

By Wayne Cutler

U.S. households increasingly are making retirement investment decisions on their own, often placing nest-egg balances in different types of accounts at multiple institutions. And a huge chunk of that money has gone into everyday banking products.

Our research indicates that at the end of 2008 households held roughly $8.6 trillion of retirement balances in certificates of deposit, money market deposit accounts, money market mutual funds and other types of retail savings and investment accounts. It is money that came into the industry through individual product purchases, usually with no signal that it is earmarked for retirement.

One handicap for banks is that customer interaction with this “shadow retirement market” often is limited to fulfilling transactions. There’s precious little customer dialogue when the bank is serving self-directed retirement investors, and scant insight into how these products fit with overall household retirement plans and goals.

Within a typical retail bank CD portfolio, it is not uncommon to find that from half to three-fourths of all balances are retirement-earmarked funds from single-account household relationships. That spells exposure as a recovering market presents more compelling investment alternatives, as well as lost opportunity to help households achieve their larger retirement goals.