401(k) Investors Continued to Diversify in 2011

IB.Dec12.380.K-Update.Pg1401(k) savers continued to seek diversified portfolios in 2011, with 61 percent of 401(k) participants’ assets invested in equity securities and 34 percent in fixed-income securities, on average, according to the annual update of a joint study released by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).

The study, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011,also finds target-date funds are playing an increasingly important role in that diversification with 72 percent of 401(k) plans offering target-date funds in their investment lineup at year-end 2011, compared with 70 percent at year-end 2010 and 57 percent at year-end 2006. At year-end 2011, 13 percent of the assets in the EBRI/ICI 401(k) database was invested in target-date funds, up from 11 percent in 2010 and 5 percent in 2006. In addition, 39 percent of 401(k) participants held target-date funds at year-end 2011, compared with 36 percent in 2010 and 19 percent in 2006.

IB.Dec12.K-update.PR-Fig

“When planning their retirement savings strategy, participants increasingly use tools such as target-date funds, which are designed to offer a mixed investment portfolio of equity and fixed-income securities that automatically rebalances to be more focused on income over time, to get diversification,” said Sarah Holden, senior director of retirement and investor research at ICI and coauthor of the study. “The study’s findings highlight that 401(k) participants, particularly recent hires, are opting to diversify their account balances, either actively or as a result of plan design.”

The study finds that more new or recent hires invested their 401(k) assets in balanced funds, including target-date funds. For example, 51 percent of the account balances of recently hired participants in their 20s was invested in balanced funds at year-end 2011, up from 44 percent in 2010 and 24 percent in 2006. At year-end 2011, 40 percent of the account balances of recently hired participants in their 20s was invested in target-date funds, compared with 35 percent in 2010 and 16 percent in 2006.

“A growing number of employers have taken advantage of plan design enhancements such as automatic enrollment, contribution acceleration, and qualified default investment alternatives, including target-date funds, that can help participants make better savings decisions,” noted Jack VanDerhei, EBRI research director and coauthor of the study. “That impact is particularly noticeable in the data regarding new hires and younger workers.”

The full analysis is being published in the December 2012 EBRI Issue Brief and ICI Research Perspective, online at www.ebri.org and www.ici.org/research/perspective It was written by ICI’s Holden; EBRI’s VanDerhei; Luis Alonso, EBRI director of information technology and research databases; and Steven Bass, ICI associate economist, based on the EBRI/ICI database of employer-sponsored 401(k) plans, the largest of its kind and a collaborative research project undertaken by the two organizations since 1996. The 2011 EBRI/ICI database includes statistical information on about 24 million 401(k) plan participants, in 64,141 plans, holding  $1.415 trillion in assets, covering nearly half of the universe of 401(k) participants.

Out of Cite?

By Nevin Adams, EBRI

Adams

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)

Notes
(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.

401(k) Ownership Continues to Grow, While IRA Ownership Falls

Although fewer American families are participating in a retirement plan at work, more of those with a plan are in a 401(k). At the same time, ownership of individual retirement accounts (IRAs) is falling, according to a new report by EBRI.

Analyzing the four-year period from 2007‒2010, EBRI finds that the share of American families with a member in any employment-based retirement plan from a current employer increased steadily from 38.8 percent in 1992 to 40.6 percent in 2007, before declining in 2010 to 37.9 percent.

Ownership of 401(k)-type plans among families participating in a retirement plan more than doubled from 31.6 percent in 1992 to 79.5 percent in 2007, and increased again in 2010 to 82.1 percent. But the percentage of families owning an IRA or Keogh retirement plan (for the self-employed) declined from 30.6 percent in 2007 to 28.0 percent in 2010. In addition, the percentage of families with a retirement plan from a current employer, a previous employer’s defined contribution plan, or an IRA/Keogh declined from 66.2 percent in 2007 to 63.8 percent in 2010.

As in the past, EBRI found that retirement plan assets account for a growing majority of most Americans’ financial wealth, outside the value of their home. The median (mid-point) percentage of families’ total financial assets comprised by defined contribution plan assets and/or IRA/Keogh assets (assuming the family had any) increased from 2007 to 2010, and accounted for a clear majority of these assets:

  • Defined contribution plan balances accounted for 58.1 percent of families’ total financial assets in 2007, and that share grew to 61.4 percent in 2010.
  • 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. Across all demographic groups, these assets account for a very large share of total financial assets for those who own these accounts.

However, the EBRI report notes that the most recent data, along with other EBRI research, indicate that many people are unlikely to afford a comfortable retirement. “Americans lost a tremendous amount of wealth between 2007 and 2010, and the percentage of families that participated in an employment-based retirement plan and/or owned an IRA decreased as well,” said Craig Copeland, EBRI senior research associated and author of the report.

However, he added, the percentage of family heads who were eligible to participate in a defined contribution plan and actually did so remained virtually unchanged during this time. Therefore, despite all the bad news that resulted from this period, one positive factor should be noted: “Those eligible to participate in a retirement plan continued to participate—which may help change the likelihood of a lower retirement standard for many Americans,” Copeland said.

The full report is published in the September 2012 EBRI Issue Brief, available at EBRI’s Web site at www.ebri.org   The press release is online here.

 

Average IRA Balances a Third Higher When Multiple Accounts are Considered

The average IRA balance is about a third higher and the median (mid-point) balance is almost 42 percent larger when multiple individual retirement accounts (IRAs) owned by an individual are taken into account, according to a new report by the nonpartisan Employee Benefit Research Institute (EBRI).

EBRI’s new analysis, based on its unique EBRI IRA Database,™ shows that in 2010 the average IRA individual balance (all accounts from the same person combined) was $91,864, while the median balance was $25,296. By comparison, the average and median account balance of all IRAs was $67,438 and $17,863, respectively. Compared with 2008, the average and median individual balances are up 32 and 26 percent, respectively.

“The results show the importance of being able to look at an aggregation of an individual’s combined account balances to determine the potential total retirement savings he or she has,” said Craig Copeland, EBRI research associate and author of the report. The report provides results for the second year of data available from the EBRI IRA Database.™

The full report is published in the May 2012 EBRI Issue Brief, “Individual Retirement Account Balances, Contributions, and Rollovers, 2010: The EBRI IRA Database,™” online at http://www.ebri.org It analyzes 2010 data from the more than 11 million individuals with more than $1 trillion in the EBRI IRA Database™ and highlights the distribution of IRA owners by IRA types, account balances, rollovers, and contributions to IRAs. A unique aspect of the EBRI IRA Database™ is the ability to link the balances of individuals with more than one account in the database, providing a more complete picture of their IRA-based retirement savings.

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