“Repeat” Performance

Nevin AdamsBy Nevin Adams, EBRI

A few months back, I was intrigued to catch several episodes of “Cosmos,” an updated version of the classic 1980 Carl Sagan series.  Along with the significantly expanded and enhanced visuals and (to me, anyway, generally annoying) animations, the series recounted the work, travails and accomplishments of Edmond Halley, who, even today, is probably best remembered for the comet whose 75-year cycle he identified and which still, as Halley’s Comet, bears his name.

Halley wasn’t the first to see the comet, of course – in fact, it had been recorded by Chinese astronomers as far back as 240 BC, noted subsequently in Babylonian records, and perhaps most famously shortly before the 1066 invasion of England by William the Conqueror (who claimed the comet’s appearance foretold his success).  Halley noted appearances by the comet in 1531, 1607 and 1682, and based on those prior observations – and the application of the work and mathematical formulas of his friend Isaac Newton – predicted the return of the comet in 1758, which it did, albeit 16 years after his death in 1742.

Of course, the importance of repeated, measured observations isn’t restricted to celestial phenomena.  Consider that individual retirement accounts (IRAs) currently represent about a quarter of the nation’s retirement assets; and yet, despite an ongoing focus on the accumulations in defined benefit (pension) and 401(k) plans that have, via rollovers, fueled a significant amount of this growth, a detailed understanding as to how these funds are actually used during retirement has, to date, not been as well understood.

To address this knowledge shortfall, the Employee Benefit Research Institute has developed the EBRI IRA Database, which includes a wealth of data on IRAs including withdrawals or distributions, both by calendar year and longitudinally, which provides a unique ability to analyze a large cross-sectional segment of this vital retirement savings component, both at a point in time and as the individual ages and either changes jobs or retires.  Indeed, as a recent EBRI publication notes, the rate of withdrawals from these IRAs is important in determining the likelihood of having sufficient funds for the duration of an individual’s life, certainly where these balances are a primary source of post-retirement income.

Previous EBRI reports[i] have explored this activity for particular points in time, but a recent EBRI analysis[ii] looked for trends in the withdrawal patterns of a longitudinal three-year sample of individual post-retirement withdrawal activity, specifically those age 70 or older (in 2010), the point at which individuals are required by law to begin withdrawing money from their IRAS.

The EBRI analysis concluded that, when looking at the withdrawal rates for those ages 70 or older, the median of the average withdrawal rates over a three-year period indicated that most individuals are withdrawing at a rate that not only approximates what they are required by law to withdraw, but at a rate that is likely to be able to sustain some level of post-retirement income from IRAs as the individual continues to age.

Furthermore, the report notes that an examination of these trends over this period suggests that, based on the resulting distribution of average withdrawal rates over time as a function of the initial-year withdrawal rate, the initial withdrawal rate for those in this age group appeared to be one that these individuals are likely to continue to make the next year.

Of course, while the median withdrawal rates suggest many individuals would be able to maintain the IRA as an ongoing source of income throughout retirement, further study is needed to see if these individuals are maintaining those withdrawal rates over longer periods of time.  Moreover, the integration of IRA data with data from employment-based defined contribution retirement accounts currently underway as part of initiatives associated with EBRI’s Center for Research on Retirement Income (CRI) will allow for an even more comprehensive picture of what those who may have multiple types of retirement accounts do as they age through retirement.

And we won’t have to wait 75 years to see how it turns out.

  • Notes

[i] See “IRA Withdrawals, 2011” online here.   See also ““Take it or Leave it? The Disposition of DC Accounts: Who Rolls Over into an IRA? Who Leaves Money in the Plan and Who Withdraws Cash?” online here

[ii] See “IRA Withdrawals in 2012 and Longitudinal Results, 2010–2012” online here

Source “Spots”

Nevin AdamsBy Nevin Adams, EBRI

Individual retirement accounts (IRAs) have been around a long time – since the Employee Retirement Income Security Act of 1974 (ERISA), in fact[i].

Today IRAs represent nearly $6 trillion in assets, approximately a quarter of the $23.7 trillion in retirement plan assets in the nation. As an account type, they currently hold the largest single share of U.S. retirement plan assets with, as a recent EBRI publication notes, a substantial (and growing) portion of these IRA assets having originated in other tax-qualified retirement plans, such as defined benefit (pension) and 401(k) plans. Recognizing not only the significant growth but the increasing importance of these accounts to individual retirement security, the Department of Labor has proposed expanding ERISA’s fiduciary protections to these accounts.

To help better understand the trends driving this critical retirement savings component, the EBRI IRA Database, an ongoing project that collects data from IRA plan administrators across the nation, was created. For year-end 2012, it contained information on 25.3 million accounts owned by 19.9 million unique individuals, with total assets of $2.09 trillion. The EBRI IRA Database is unique in its ability to track individual IRA owners with more than one account, thereby providing a more accurate measure of how much they have accumulated in IRAs.

For example, a recent EBRI analysis[ii] notes that the average IRA account balance in 2012 in the EBRI IRA database was $81,660, while the average IRA individual balance (all accounts from the same person combined) was $105,001. Overall, the cumulative IRA average balance was 29 percent larger than the unique account balance.

While almost 2.4 million accounts in the EBRI IRA database received contributions in 2012, compared with the 1.3 million accounts that received rollovers for that year, the amount added to IRAs through rollovers was 10 times the amount from contributions.

However, an annual-snapshot percentage of IRA contributions doesn’t show whether the same individuals were contributing over time, or if different people contributed in different years. Taking advantage of the ability to look at multiple years across multiple accounts of individual owners across the EBRI IRA database, the report notes that while approximately 10 percent of traditional IRA owners contributed at some point during the three-year period, only 6 percent contributed to their IRA each year. On the other hand, while approximately 25 percent contributed to their Roth IRA in any one year, 35 percent did so at some point over the three-year period.

Looking at the pace of contribution activity, the EBRI analysis found that among those who contributed to their IRA in each of the three years, the pattern seemed pretty consistent: 12.1 percent did so in 2010, 13.2 percent in 2011, and 13.1 percent in 2012. Looking at the specific sources of those contributions, among traditional IRAs, we find that the percentage that contributed to them rose from 5.2 percent in 2010 to 6.6 percent in 2012 – but among Roth IRA owners, 24.0 percent contributed in 2010, 26.0 percent in 2011, and 25.1 percent in 2012.

Consider too that, among traditional IRA owners, only 3.0 percent contributed all three years, compared with 15.0 percent of Roth IRA owners who did so. Moreover, Roth IRA owners ages 25–29 were the most likely to contribute in any year and all three years (56.1 percent and 24.3 percent, respectively). Indeed, more than 4 in 10 (43 percent) Roth owners ages 25–29 contributed to their Roth in 2012.

The EBRI analysis found significant differences in the distribution patterns among older IRA owners, specifically those ages 70 or older, due to the required minimum distribution (RMD) rules. Those rules require individuals to begin making withdrawals from traditional IRAs starting April 1 of the year following the calendar year in which they reach age 70½. However, the RMD rules do not apply to Roth IRAs, a factor that likely explains the continued increases in account balances for Roth owners in that age group.

In sum, while the gross accumulations of retirement savings in IRAs provide value in terms of quantifying an increasingly significant component of the nation’s retirement security, a focus that takes into account only aggregate movements, or isolated account holdings, one that ignores the original source(s) of the money in the account, and/or the accompanying restrictions, runs the risk of overlooking significant undercurrents.

Undercurrents that may provide a better understanding of the growth trends in this important savings vehicle and ultimately, of course, explain how – and when – these retirement savings are withdrawn.

  • Notes

[i] Originally designed as a means to provide workers who did not have employment-based pensions an opportunity to save for retirement on a tax-deferred basis, IRAs have undergone a number of changes over time. The Economic Recovery Tax Act of 1981 (ERTA) extended the availability of IRAs to all workers with earned income (including those with pension coverage), while the Tax Reform Act of 1986 (TRA ’86) brought with it some restrictions on the tax deductibility (and, in some cases, availability) of IRA contributions. A decade later the Taxpayer Relief Act of 1997 (TRA ’97) created a new type of nondeductible IRA—the Roth IRA—and allowed nonworking spouses to contribute to an IRA, subject to certain income restrictions.

[ii] The May 2014 EBRI Issue Brief, “Individual Retirement Account Balances, Contributions, and Rollovers, 2012; With Longitudinal Results 2010–2012: The EBRI IRA Database,” is available online here.



Connecting the Dots

By Nevin Adams, EBRI



One of my favorite works of art is “A Sunday Afternoon on the Island of La Grande Jatte,” by Georges-Pierre Seurat. I was introduced to this painting in college via an art appreciation class at the Art Institute in Chicago (it even makes a brief appearance in the film “Ferris Bueller’s Day Off”). The subject matter isn’t really extraordinary―just a group of individuals scattered about a park taking in the scenery. But what amazed me the first time I got close to the painting―and does to this day―is that Seurat created these images, and the marvelous color shadings in these images, through the use of thousands (perhaps millions: the painting itself measures 7 by 10 ft.) of individual dots.

Individual retirement accounts (IRAs) are a vital component of U.S. retirement savings, representing more than 25 percent of all retirement assets in the nation, with a substantial portion of these IRA assets originating in employment-based retirement plans, including defined benefit (pension) and 401(k) plans. Little wonder that those accounts have been a focus of the pending fiduciary regulation re-proposal.

Despite IRAs’ importance in the U.S. retirement system, there is a limited amount of knowledge about the behavior of individuals who own IRAs, alone or in combination with employment-based defined contribution (DC) plans.

Consequently, the Employee Benefit Research Institute (EBRI) created the EBRI IRA Database, which for 2011 contained information on 20.5 million accounts with total assets of $1.456 trillion. When looking across the entire EBRI IRA Database, as of year-end 2011, 44.4 percent of the assets were in equities, 10.7 percent in balanced funds, 18.0 percent in bonds, 13.0 percent in money, and 13.8 percent in other assets―an allocation spread roughly comparable to that found for 401(ks) in the EBRI/ICI 401(k) database at a comparable point in time.

But when you look inside the IRA database, certain interesting aspects emerge. For example, the asset allocation differences between genders were minimal: bond, equity, and money allocations were virtually identical. Moreover, in looking across IRA types, the average equity allocation at each age group was higher for owners of Roth IRAs than for owners of other IRA types―this is perhaps not surprising when you consider that a separate EBRI analysis also revealed that individuals contributing to Roth IRAs tended to be younger. Additionally, as the most recent report reveals, balanced funds have by far the largest asset allocations among young (under age 45) Roth IRA owners.

One might not be surprised to discover that both genders’ average allocations to bonds increased with age (starting at age 25), although the average amount allocated to balanced funds decreased as the age of both genders increased after age 25―with the exception of men ages 75–84. And while equity allocations for genders peaked and then plateaued for those ages 45−54, it then proceeded to INCREASE for male owners age 85 or older.

Of course, an IRA could be only part of an individual’s portfolio of retirement assets: That’s why the goal of the integration of the EBRI databases is to be able to look at the two largest sources of retirement assets (IRAs and DC plans) to examine owner behavior across (as well as within) the accounts to provide a better understanding of the decisions Americans make with their retirement savings.

Because sometimes you need to see the big picture―and sometimes the better understanding of the big picture comes from connecting the dots.

The October EBRI Notes article, “IRA Asset Allocation, 2011” is online here. 

Also see “The Generation in Roth IRA Contributions,” online here. 

The Bigger Picture

By Nevin Adams, EBRI

AdamsOver the weekend, my daughter shared with us an insurance quote she’d received.  It had been a while since I had focused on such things, but I was struck first by how much it was.  It was for insurance in a different state, so we worked through the particulars, trying to be certain that we understood what was covered, matched that against her needs.  Ultimately, while much of the quote made sense, there were a couple of items that seemed too high.

As we probed those items, my daughter explained that the agent had made an effort to match those levels against her current coverage.  A logical enough inquiry and starting point, but one that (apparently) failed to take into account that her current coverage – as part of our family policy – would be quite different from what she needed on her own.  The agent got an accurate response to the question he asked – but it wasn’t the right question.

Individual Retirement Accounts, or IRAs, hold more than 25 percent of all retirement assets in the United States, which makes them a vital component of the nation’s retirement savings.  In fact, as an account type, IRAs currently hold the largest single share of U.S. retirement plan assets.  There are, however, different types of IRAs, and, according to a recent EBRI analysis[i], they differ in a number of ways.

For example, in the EBRI IRA Database[ii], which contains data collected from various IRA plan administrators on 20.5 million accounts, with total assets of $1.456 trillion, most of the new IRA contributions go into Roth IRAs, but most of the assets are held in traditional IRAs, where, as noted above, the money frequently originated from a rollover from other tax-qualified retirement plans (such as 401(k) plans).  In fact, the latest report from the EBRI IRA Database finds that 26 percent of Roth IRA owners contributed to their accounts in 2011, compared with just 6 percent of traditional IRA owners.

On the other hand, individuals with a traditional IRA originating from rollovers had the highest average and median (mid-point) balances ($110,918 and $31,944, respectively, compared with Roth average and median balances at $25,228 and $11,344) – and in the 2011 EBRI IRA Database, almost 13 times the amount of dollars were added to IRAs through rollovers as from new contributions.

Roth IRAs had a higher percentage of younger individuals contribute to them: 23.8 percent of the Roth accounts receiving contributions were owned by individuals ages 25–34, compared with 8.9 percent for traditional IRAs.  Moreover, Roth IRA owners were both more likely to contribute to their IRA and more likely to contribute in subsequent years – and those who are younger and own a Roth IRA were more likely to contribute to it than older Roth IRA owners.

While they account for nearly one in five of the accounts in the EBRI IRA Database, Roth IRAs represented only 7 percent of the $1.456 trillion in assets at year-end 2011.  Still, it’s easy to imagine how the trend differences highlighted above could, over time, impact key trends in terms of contributions, asset allocation, and withdrawal patterns[iii].

Research sometimes suffers from a tendency to extrapolate big conclusions from remarkably small samples.

On the other hand, the EBRI IRA database, with millions of individual account records drawn from multiple account providers, allows us to see the big picture, as well as the details that underlie, and perhaps shape, the longer-term trends.


[ii] The EBRI IRA Database contains data collected from various IRA plan administrators on 20.5 million accounts owned by 16.6 million unique individuals with total assets of $1.456 trillion. EBRI is building a database that will allow it to track the flow of retirement assets saved in 401(k) plans and other tax-qualified plans and transferred to IRAs and spent in retirement as people leave the work force.

[iii] The EBRI IRA Database is also unique in its ability to track people who own multiple IRAs, providing a measure of individuals’ consolidated IRA holdings. For instance, it shows that the overall cumulative IRA average balance was 24 percent larger than the unique account balance, providing a far more accurate picture of the assets held in these accounts by individuals.

Balancing “Acts”

By Nevin Adams, EBRI



Last week we looked at how the trends in employment-based retirement plans and employment-based health plans seem to be heading in opposite directions: fewer choices for workers to make in the former, more in the latter (see Consumer “Driven,” online here.  Recent EBRI research suggests a potential divergence in other areas as well.

According to the EBRI/MGA Consumer Engagement in Health Care Survey, 26–40 percent of respondents reported some type of access-to-health-care issue for either themselves or family members last year. “Access” in this case refers not to availability, per se, but is broadly defined as not filling prescriptions due to cost, skipping doses to make medication last longer, or delaying or avoiding getting health care due to cost.

Not surprisingly, access is more of a problem among those with lower incomes, who appear to be forgoing spending on health care. In fact, regardless of health plan type, individuals in households with less than $50,000 in annual income were more likely than those in households with $50,000 or more in annual income to report access issues. In sum, a number of individuals, notably lower-income workers, were restricting their spending on healthcare.¹

Another recent EBRI analysis  found that lower-income workers were withdrawing money from their individual retirement accounts in much greater numbers, earlier, and at much larger percentages, than other workers. In fact, the report noted that nearly half (48 percent) of the bottom-income quartile of those between the ages of 61 and 70 had made such an IRA withdrawal, and that their average annual percentage of account balance withdrawn (17.4 percent) was higher than the rest of the income distribution. In sum, a number of individuals, again, notably lower-income workers, were withdrawing more from their retirement savings accounts than those in higher income groups.

One of the great hopes behind a growing emphasis on consumer-directed health plans is that individuals would make different, perhaps more efficient decisions about their health care. Of course, one of the looming concerns is that individuals would make ill-informed decisions influenced by short-term personal economic (rather than health) factors. Similarly, there have been concerns expressed that, left to their own devices, individuals will withdraw too much money too soon from their retirement accounts—that their decisions too will be motivated by short-term needs, rather than by a full appreciation for the longer-term consequences of those actions.

As previous EBRI research has documented, the availability of health insurance may not only affect retirement decisions, but the costs of health care and long-term care can have a very real impact on retirement income adequacy.² The trends highlighted in the EBRI analyses suggest that some—notably lower-income individuals—could be spending less on healthcare than they might, and perhaps drawing more from their retirement accounts than they should.

What’s not yet clear—and what future research may shed light on—is whether these actions are borne of necessity, are simply random and potentially ill-considered, or are the result of conscious (and perhaps conscientious) choice.


¹ Some additional evidence of the trend was highlighted by EBRI research recently published in Health Affairs, specifically that consumer-directed health plans (CDHPs) were shown to reduce the long-term use of outpatient physician visits and prescription drugs. Link is online here.

² See Views on Health Coverage and Retirement: Findings from the 2012 Health Confidence Survey, and ‘Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News.” 

See also “Lessons From the Evolution of 401(k) Retirement Plans for Increased Consumerism in Health Care: An Application of Behavioral Research,” online here.

“Drawing” Board?

By Nevin Adams, EBRI



While drawing boards have been used by engineers and architects for more than two centuries, the phrase “back to the drawing board” is of much more recent origin, coined by the Peter Arno in a cartoon first published in the March 1, 1941 issue of New Yorker magazine.(1) The cartoon features a crashed plane in the background, a parachute in the distance, several military officials and rescue workers rushing to help/investigate—and one remarkably nonchalant individual, walking in the opposite direction with a rolled up document tucked under his arm as he comments, “Well, back to the old drawing board.”

For all the much-deserved focus on retirement savings accumulations, a growing amount of attention is now directed to how those already in (and fast-approaching) retirement are actually investing and drawing down those savings.

A recent EBRI analysis(2) found that at age 61, only 22.2 percent of households with an individual retirement account (IRA) took a withdrawal from that account. That pace slowly increases to 40.5 percent by age 69 before jumping to 54.1 percent at age 70, and by the age of 79, almost 85 percent of households with an IRA took a distribution.

IRAs are, of course, a vital component of U.S. retirement savings, holding more than 25 percent of all retirement assets in the nation, according a recent EBRI report. A substantial and growing portion of these IRA assets originated in other employment-based tax-qualified retirement plans, such as defined benefit (pension) and 401(k) plans.

The EBRI analysis also found that the percentage of households with an IRA making a withdrawal from that account not only increased with age, but also spiked around ages 70 and 71, a trend that appears to be a direct result of the required minimum distribution (RMD) rules in the Internal Revenue Code.(3) Those rules require that traditional IRA account holders begin to take at least a specific amount from their IRA no later than April 1 of the year following the year in which they reach age 70-½, or else suffer a fairly harsh tax penalty.

In fact, at age 71, 71.1 percent of households owning an IRA that took a withdrawal reported that they took only the RMD amount, increasing to 77.4 percent at age 75, 83.2 percent at age 80, and 91.1 percent by age 86.

However, the EBRI report noted that IRA-owning households not yet subject to the RMD—those headed by individuals between the ages of 61 and 70—made larger withdrawals than older households, both in absolute dollar amounts as well as a percentage of IRA account balance. Indeed, the bottom-income quartile of this age group had a very high percentage (48 percent) of households that made an IRA withdrawal—and their average annual percentage of account balance withdrawn (17.4 percent) was higher than the rest of the income distribution. Moreover, those younger households that made IRA withdrawals spent most of it.

While a significant percentage of those in the sample are drawing out only what the law mandates, the data indicate that more of those in the lower-income groups not only draw money out sooner, but also draw out a higher percentage of their savings—perhaps too early to sustain them throughout retirement.(4)

Planning and preparation matters—not only for retirement savings, but in retirement withdrawals. Because for those whose retirement resources run short too soon, it’s generally also too late to go “back to the drawing board.”


(1) You can see the original cartoon online here.

(2) The data for this study come from the University of Michigan’s Health and Retirement Study (HRS), which is sponsored by the National Institute on Aging. See “IRA Withdrawals: How Much, When, and Other Saving Behavior,” online here.

(3) As noted in a previous post (see “Means Tested”), there are advantages to a drawdown strategy based on the schedule provided by the Internal Revenue Service (IRS) for required minimum distributions, or RMDs. See also Withdrawal “Symptoms.”

(4) The EBRI Retirement Readiness Ratings™ indicate that approximately 44 percent of the Baby Boomer and Gen-Xer households are simulated to be at-risk of running short of money in retirement, assuming they retire at age 65 and retain any net housing equity in retirement until other financial resources are depleted. Those individuals may well become part of the significant percentage of retirees who eventually must depend on Social Security for all of their retirement income. See “All or Nothing? An Expanded Perspective on Retirement Readiness.”

“Like” Minded?

By Nevin Adams, EBRI



Several weeks back, my wife and I sat down with a financial planner to review and update our financial plans. Doing so brought with it a bit of personal trepidation since, being “in the business” I not only had a working knowledge of what needed to be done, I also had a pretty good sense of what hadn’t been done, and what hadn’t been done the way it should have been done in some time. As I surrendered copies of the statements from my three separate 401(k) accounts, rollover IRA, traditional IRA, and SEP-IRA, I found myself wondering (again) why I hadn’t gotten around to consolidating some of those accounts.

More and more Americans are finding themselves with multiple savings accounts, not only because of the relatively consistent pattern of job change in the American economy (see “Tenure, Tracked”), but because those job changes frequently result in rollovers to individual retirement accounts. On the other hand, in recent years, it has gotten easier to simply leave your 401(k) with a prior employer’s plan, and, with the convenience of online access and/or call center support, and the allure of inertia, many have surely opted to forestall, if not postpone the decision.

Those decisions have, of course, made it harder to assess the true accumulations in these plans. Indeed, today’s “average” 401(k) calculation suffers not only from being an average of widely varied tenure and age components, it increasingly represents the average of those balances with only a current employer plan.

But if you’re an individual worried about keeping up with all those accounts―or a regulator or policymaker concerned about the growing complexity of that task for those individuals―you might well wonder how those accounts are being managed? Are the investment allocations in those IRAs different from that of the 401(k)s?

New EBRI research (see “Retirement Plan Participation and Asset Allocation, 2010”) reveals that, in addition to demographic factors related to family heads, asset allocation within a family head’s retirement plan does seem to be affected by his or her ownership of other types of retirement plans.

According to the research, which was based on estimates from the Federal Reserve’s 2010 Survey of Consumer Finances,¹ those who own an IRA are more likely to be invested all in stocks if they also own a 401(k)-type of plan, and those who own a defined benefit (DB) plan and a 401(k)-type plan are also less likely to allocate the investments of that defined contribution plan to all interest-earning assets. Moreover, those family heads who are invested more heavily in stocks in their 401(k)-type plan and also own an IRA have a high probability of also being heavily invested in stocks in their IRA.

The bottom line? Participants in these plans generally invest them in similar manners, although some participants did have significantly different allocations across the two plan types. What we don’t know is if those similarities―and differences―are the result of conscious choice based on an awareness of these various plans, a consequence of investments in target-date or balanced funds, or mere coincidence.


¹ It is worth noting that, while these results provide important information on behavior within retirement savings plans, it is self-reported data from a survey of a small sample of respondents, and does not include the type of detail on asset allocation within 401(k) plans that is provided by the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project or on IRAs that is provided by the EBRI IRA Database. However, these results do provide some evidence of how participants who own both types of retirement plans allocate their assets among both types of plans, and this can be evaluated with future results from the combined IRA and 401(k) database that EBRI is currently completing.

Out of Cite?

By Nevin Adams, EBRI


Our industry pays a lot of attention to the investment choices that retirement plan participants make; we fret about the type and number of choices on their investment menu, the efficacy of target-date funds, the utilization of active versus passive investment strategies, and the prudence of the asset allocation choices that individuals make—with or without the benefit of tools and/or professional guidance. Unfortunately, once they leave that part of our private retirement system, not so much.

A significant percentage of that retirement plan money winds up in individual retirement accounts, or IRAs. In fact, today IRAs represent more than a quarter of all retirement assets in the U.S., according to a recent EBRI Issue Brief. But there remains a limited amount of knowledge about the investment behavior of individuals who own IRAs, alone or in combination with employment-based retirement plans.

In order to fill this gap, EBRI has undertaken an initiative to study in depth this connection between DC plans and IRAs, and created the EBRI IRA Database,(1) which links individuals (both within and across data providers) in this IRA database and with participants in DC plans. The asset allocation across ages within each IRA type(2) had some minor differences, but, in general, the percentages allocated to equities and balanced funds declined as the owner became older, and the percentage allocated to bonds and other assets increased. Additionally, as the account balances increased, the percentages of assets in equities and balanced funds combined decreased, while bond and “other” assets’ shares increased. While gender differences abound in many walks of life, male and female IRA owners had virtually identical allocations in bonds, equities, and money in the EBRI IRA database, though males were slightly more likely to have assets in the “other”(3) category, and females had a higher percentage of assets in balanced funds.

Among IRA categories, Roth IRAs had the highest share of assets in equities (59.1 percent) and balanced funds (15.5 percent). Of course, Roth owners are younger, on average, than rollover owners, and Roth IRAs tend to be supplemental savings funded by individual contributions only, whereas rollovers tend to be the main or primary retirement savings for workers nearing retirement or retirees.

Indeed, the most significant difference among IRA types is that Roth owners were much more likely to have 90 percent or more of their accounts invested in equities than in other asset types, and were correspondingly likely to have less than 10 percent of their assets in bonds and money combined. Once again, the likelihood of these “extreme” allocations was very similar across genders.

When comparing the overall percentage of 401(k) assets held in equities (equities, equity share in balanced funds, and company stock) from the EBRI/ICI 401(k) database, the number is relatively close to that found in the IRA accounts (60.0 percent in 401(k) plans and 52.1 percent in IRAs), although the bond and money percentages are higher for IRAs than 401(k) plans (19.9 percent and 11.6 percent, respectively, for bonds and 8.9 percent and 4.4 percent, respectively, for money), while balanced funds constitute more of the assets in 401(k) plans than in IRAs. In sum, while it wasn’t the focus on the study, the average asset allocation found for IRAs was similar to that in 401(k) plans.

Of course, those IRA balances likely aren’t the totality of the retirement savings for these individuals, and thus, whether that particular allocation—looked at in isolation—is “good” news or not, remains to be seen.(4)

(1) The Employee Benefit Research Institute’s retirement databases (the EBRI/ICI Participant-Directed Retirement Plan Database, the EBRI IRA Database, and the EBRI Integrated Defined Contribution/IRA Database) have been the subject of multiple independent security audits and have been certified to be fully compliant with the ISO-27002 Information Security Audit standard. Moreover, EBRI has obtained a legal opinion that the methodology used meets the privacy standards of the Gramm-Leach-Bliley Act. At no time has any nonpublic, personal information that is personally identifiable, such as Social Security number, been transferred to or shared with EBRI. None of the three databases allows identification of any individuals or plan sponsors.

(2) The report considered four types of IRAs: traditional-contributions (traditional IRAs originating from contributions, in which distributions are taxable); Roth (in which contributions are nondeductible and distributions are tax free); SEP (Simplified Employee Pension)/SIMPLE (Savings Incentive Match Plan for Employees); and traditional-rollovers (traditional IRAs originating from assets rolled over from other tax-qualified plans, such as an employment-based pension or DC plans, in which distributions are taxable)

(3) “Other” assets includes assets that do not fit into the categories of equities, bonds, money/cash equivalents, or balanced funds. This could include stable-value funds, real estate (both from investment trusts and directly purchased), fixed and variable annuities, etc.

(4) As the EBRI IRA Database expands, more elaborate studies are being conducted. Linked with defined contribution account data, the tracking of movements of money between multiple retirement saving accounts (DC plans and IRAs) is being studied to see what, if any, asset allocation changes are being made when assets are moved between accounts. Furthermore, once individuals have reached retirement, the withdrawal or “spend-down” of those assets over time can be studied based on the longitudinal data that will be available, offering the potential of a far greater understanding of the retirement preparation and post-retirement behavior of Americans as these databases mature.

IRA Allocations Vary By Age, Balance, and Type – But Not Gender

The investment allocation of individual retirement accounts (IRAs) varies by a variety of factors, but the asset allocation differences between genders was minimal, according to a new report by EBRI.

Those older, having higher account balances, or owning a traditional IRA that originated as a rollover had, on average, lower allocations to equities, according to the report, which notes that as account balances increased, the percentages of assets in equities (i.e., direct ownership, mutual funds, etc.) and balanced funds (including target-date funds) combined decreased, while bond (i.e., direct ownership, mutual funds, etc.) and “other” (i.e., real estate, annuities, etc.) assets’ shares increased.

Equity allocations for the youngest IRA owners (under age 35) with small account balances were the lowest across the age groups. However, when balances reached $10,000 or more, younger IRA owners had significant increases in equity allocations, such that those ages 25−34 with the largest account balances had the largest equity allocation.

“Those under age 45 were much more likely to use balanced funds than were older IRA owners, and those under age 35 with balances less than $25,000 had particularly higher allocations to balanced funds,” noted Craig Copeland, EBRI senior research associate and author of the report. “This shift follows the standard investing ‘rule of thumb’ that individuals should reduce their allocation to assets with high variability in returns (equities) as they age.”

These and other findings come from the latest update of the EBRI IRA Database, an ongoing project by EBRI that currently contains information on 14.85 million accounts of 11.1 million unique individuals with total assets of $1.002 trillion, as of year-end 2010. The EBRI IRA Database is able to provide a more complete assessment of cumulative IRA investments and activity by virtue of its ability to link the holdings of individual IRA owners both within and across data providers.

The press release is online here. The full report is online here. 

Wealth Connected?

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.

– Notes

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.