October 12, 2012
By Nevin Adams, EBRI
A recent EBRI Issue Brief (Individual Account Retirement Plans: An Analysis of the 2010 Survey of Consumer Finances) examined trends in individual account retirement plans.
Analyzing the information from the Survey of Consumer Finances (SCF)1, it was not surprising to find that the median (midpoint) net worth of American families decreased by 38.8 percent from 2007 to 2010, and the median value of family income also decreased during that period (though at a much smaller rate of 7.7 percent).
At the same time, defined contribution retirement plan balances came to represent a larger portion of families’ total financial assets among families with these plans; 61.4 percent in 2010, compared with 58.1 percent in 2007. Defined contribution and/or IRA/Keogh balances increased their share as well, from 64.1 percent of total family financial assets in 2007 to 65.7 percent in 2010. And, while regular IRAs account for the largest percentage of IRA ownership, it is perhaps not surprising to find out, as the EBRI analysis reveals, that rollover IRAs had a larger share of assets than regular IRAs in 2010.
The Issue Brief notes, “[t]he employment-based system is generating much of this wealth from individual account retirement plans, because it includes, obviously, all of the defined contribution assets (especially from 401(k)s) as well as approximately 45 percent of IRA wealth,” as well as rollovers of lump sum distributions from defined benefit plans2.
Perhaps not surprisingly, the SCF data show that participation in an employment-based retirement plan was strongly linked to family income and the family head’s educational level and race. However, in terms of net worth, families within the highest 10 percent of net worth were most likely to have a retirement plan participant in 2010, while the two net worth percentile breaks just below the highest had similar levels of participation to that of the highest net worth families. As recently as 2007, families in the lower levels of percentile of net worth were more likely to have a participant than those in the highest level.
However, the EBRI Issue Brief also looks at a comparison of the mean and median net worth across family income and age of family head shows that families with ANY type of individual account retirement plan (defined contribution plan from current or previous employer or an IRA/Keogh plan) not only have larger amounts of wealth, but that wealth is substantially larger across each and every income and age of household group (see chart below). Consider that the median household wealth for a family with annual income of less than $25,000 that had an individual account retirement plan was $118,000, while the median household wealth for a family in the same income category, but with no individual retirement account, was $5,800.
It is perhaps not surprising to find that those with more income or wealth are more likely to have an individual retirement plan account.
However, it’s surely worth noting that the data suggest that those with an individual retirement plan account – any individual retirement plan account – at even the lowest income levels, look to be much better off.
1The Survey of Consumer Finances is, as its name suggests, a survey of consumer households “to provide detailed information on the finances of U.S. families.” It is conducted every three years by the Federal Reserve, and is eagerly awaited and widely used—from analysis at the Federal Reserve and other branches of government to scholarly work at the major economic research centers. The 2010 version was published in June.
2Lump-sum distributions are increasingly available in DB plans. For example, in 2010, 46 percent of full-time employees in private-sector DB plans were eligible for a lump-sum distribution (U.S. Department of Labor, 2011c). That compares with 1997 and 1995, when 76 percent and 85 percent, respectively, of full-time workers participating in a DB plan in a medium or large establishment were not offered a lump-sum distribution (U.S. Department of Labor, 1999, 1998). A recent EBRI analysis of the distribution options for more than 33,000 participants in 84 defined benefit/cash balance plans in 2010 found that only about one in five had no lump sum option. Additional information will be available in a future EBRI publication.