Freedom From Choice?

By Nevin Adams, EBRI

Adams

Adams

You may remember little else about the 1989 film “Field of Dreams,” but odds are you have invoked a version of what is likely its most famous quote, “If you build it, they will come.”

Unfortunately, for many, building retirement savings is more complicated than constructing a baseball diamond in the middle of an Iowa cornfield. Most experts will tell you that the most important decision in retirement saving is deciding how much to save, not how those savings will be invested―and yet, for years, much of the education and discussion about retirement saving has been focused on investing.

Enter the target-date fund (TDF), a type of investment fund apportioned according to what investment professionals deem to be an appropriate age-based blend of stocks, bonds, and other asset classes for an individual within a particular target-date of his or her retirement. Perhaps more importantly, that apportioning is automatically rebalanced over time, as the target date approaches, becoming less focused on growth and more focused on income over time. It’s an approach to which individuals and plan sponsors alike have come to embrace with little of the reluctance that often accompanies new retirement plan designs; one that runs counter to decades of expanding retirement plan menus and education designed to help participants make better use of those choices.

Consider that 72  percent of the more than 64,000 401(k) plans in the EBRI/401(k) database, included target-date funds in their investment lineup at year-end 2011,¹ and that nearly 4 in 10 of the nearly 24 million participants in that database held target-date funds.² That’s sharply higher than 2006, the year that the Pension Protection Act of 2006 included target-date funds in its definition of qualified default investment alternatives (QDIA), when about 57 percent of plans included those offerings on their menus, and fewer than  1 in 5 participants held them in their account(s). Perhaps more significantly, at year-end 2011, 51 percent of participants in their 20s held target-date funds, compared with 32 percent of participants in their 60s.

Recently hired participants―those more likely to be automatically enrolled in their employment-based 401(k), and to have their savings automatically invested in a QDIA (frequently a target-date fund), were, not surprisingly, more likely to hold target-date funds than those with more years on the job: At year-end 2011, 51 percent of participants with two or fewer years of tenure held target-date funds, compared with 37 percent of participants with more than five to 10 years.

In fact, an August 2011 EBRI Issue Brief noted that, among consistent participants in the EBRI/ICI database who were identified as auto-enrollees in 2007, 97.2 percent were still using TDFs in 2008, and 95.7 percent used them in 2008 and 2009. Even among those not identified as auto-enrollees, just over 90 percent continued to use them from 2007‒2009 (see “Target-Date Fund Use in 401(k) Plans and the Persistence of Their Use, 2007‒2009,” online here).

Now, one can find fault with the target-date design: There are different views on what is an “appropriate” asset allocation at a particular point in time; discrete perspectives as to what asset classes belong in the mix; notions that individuals aren’t well-served by a mix that disregards individual risk tolerances; arguments over the definition of a TDF “glide path” as the investments automatically rebalance over time; and even disagreement as to whether the fund’s target-date is an end-point, or simply a milepost along the investment cycle. That said, and as the EBRI/ICI data show, target-date funds, as well as their older counterparts, the lifecycle (risk-based) and balanced fund(s), have become fixtures on the defined contribution investment menu. For a large and growing number of individuals, these “all-in-one” target-date funds, monitored by plan fiduciaries and those that guide them, are likely to be an important aspect of building their retirement future.

Of course, the future they’ll build will likely be better if those investments are properly used, carefully monitored, better understood―and funded by the appropriate amount of savings.

Notes
¹ See “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011,” online here.

² In addition, 20 percent of the participants in the EBRI/ICI 401(k) database held non–target-date balanced funds, and 3 percent held both target-date and non-target-date balanced funds at year-end 2011.

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. 

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.

 

Sums of Substance

By Nevin Adams, EBRI

An acquaintance of mine recently described to me the challenges of trying to help a family member rebalance their retirement portfolio, which at the moment was split between a 401(k), 403(b), and an IRA.

Curious, I asked him how the funds in the IRA were invested. He laughed and said, “Which one?”

The data suggest that my friend’s family member isn’t alone in that regard; the average IRA balance is about a third higher and the median (mid-point) balance almost 42 percent larger when multiple individual retirement accounts (IRAs) owned by an individual are taken into account, according to a recent Employee Benefit Research Institute (EBRI) analysis based on its unique EBRI IRA Database.™1

In fact, according to a recent EBRI report2, 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.

Individual retirement accounts (IRAs) are a vital component of U.S. retirement savings, holding more than 25 percent of all retirement assets in the nation.  Moreover, a substantial portion of these IRA assets originated in other tax-qualified retirement plans, such as defined benefit plans (pensions) and 401(k) plans, and were moved to IRAs through rollovers from those plans.

Keeping up with, and managing, retirement savings accounts remains both a challenge and an opportunity for individuals, all the more so when those savings are held in multiple accounts and locations.  Similarly, an understanding and appreciation of the complete picture offers the best perspective for crafting effective retirement savings policies.

Sometimes you can’t see the forest for the trees – but, as the data suggest, it’s important to remember that the “forest” is the sum of all the trees.

Notes

1The EBRI IRA Database™ is an ongoing project that collects data from IRA plan administrators. For year-end 2010, it contains information on 14.85 million accounts for 11.1 million unique individuals with total assets of $1.002 trillion.  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.  For more information, see Individual Retirement Account Balances, Contributions, and Rollovers, 2010: The EBRI IRA Database TM here.

2Individual Retirement Account Balances, Contributions, and Rollovers, 2010: The EBRI IRA Database TM  

Reality “Checks”

By Nevin Adams, EBRI

A recent opinion piece by Teresa Ghilarducci in the New York Times took on what she termed a “ridiculous approach to retirement,” drawn from what appears to be a series of “ad hoc” dinner conversations with friends about their “retirement plans and prospects.”

Most of the op-ed focused on the perceived shortfalls of the voluntary retirement savings system: People don’t have enough savings, don’t know how much “enough” is, make inaccurate assumptions about the length of their lives and their ability to extend their working careers, and aren’t able to find qualified help to help them make more appropriate savings decisions.   In place of the current system, which Ghilarducci maintains “will always fall short,” she proposes “a way out” via mandatory savings in addition to the current Social Security withholding.  Consider that, just three sentences into the op-ed, she posits the jaw-dropping statistic that 75 percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts.

“You don’t like mandates?  Get real,” she declares.

When we looked across the EBRI database of some 2.3 million active1 401(k) participants at the end of 2010 who were between the ages of 56 and 65, inclusive – people who have chosen to supplement Social Security through voluntary savings – we found only about half that number (37 percent) with less than $30,000 in those accounts.  Moreover, when looking at those in that group who have more than 30 years of tenure, fewer than 13% are in that circumstance – and neither set of numbers includes retirement assets that those individuals may have accumulated in the plans of their previous employers, or that they may have rolled into Individual Retirement Accounts (IRAs), as well as pensions or other savings (see Average IRA Balances a Third Higher When Multiple Accounts are Considered).

That’s not to say that the financial challenges outlined in the op-ed won’t be a reality for some. In fact, EBRI’s Retirement Security Projection Model® (RSPM) developed in 2003, updated in 20102, finds that for Early Baby Boomers (individuals born between 1948 and 1954), Late Baby Boomers (born between 1955 and 1964) and Generation Xers (born between 1965 and 1974), roughly 44 percent of the simulated lifepaths were projected to lack adequate retirement income for basic retirement expenses plus uninsured health care costs (see “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model”) .

The op-ed declares that a voluntary Social Security system “would have been a disaster.”  Indeed, an objective observer might conclude that that is why Congress originally established Social Security as a mandatory system, to provide a base of income for retirees as it still does today.   With the underpinnings of that mandatory foundation of Social Security, the current voluntary system was established to allow employers and individuals to supplement that base.  In recent decades Social Security’s benefits have been “reduced” by increases in the definition of normal retirement age, and a partial taxation of benefits, despite increases in the mandatory withholding rates, in order to adjust to the realities of rising costs from changing demographics.  Even before the recent two-year partial withholding “holiday,” Congress was, and is still today, discussing additional adjustments to that mandatory system.

The voluntary system should be judged as just that, a voluntary system.  As noted above, the data makes it clear that voluntary employer-based plans are, in fact, leading to a great deal of real savings accumulated to supplement Social Security.  Many in the nation work every day to encourage those savings to be increased (see www.choosetosave.org ).

The “real” questions, certainly as one reflects on the debate over the Affordable Care Act mandate, amidst today’s political and economic turmoil, are whether the Congress and the nation will be willing – and able – to pay the price of an expanded or new retirement savings mandate, and, regardless of that outcome, how can a voluntary system be moved to higher levels of success?

Notes

1 Active in this case is defined as anyone in the database with a positive account balance and a positive total contribution (employee plus employer) for 2010.

2 The RSPM was updated for a variety of significant changes, including the impacts of defined benefit plan freezes, automatic enrollment provisions for 401(k) plans, and the recent crises in the financial and housing markets. EBRI has recently updated RSPM to account for changes in financial and real estate market conditions as well as underlying demographic changes and changes in 401(k) participant behavior since January 1, 2010.  For more information on the RSPM, check out the May 2012 EBRI Notes, “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model.”

Last June EBRI CEO Dallas Salisbury participated in an “Ideas in Action with Jim Glassman” program discussion with Ghilarducci and Alex Brill from the American Enterprise Institute titled “America’s Retirement Challenge: Should We Ditch 401(k) Plans?”  You can view it 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.

New EBRI IRA Database Finds Owners With Multiple IRAs Raise Average Balance by 25%

A new and unique EBRI database on individual retirement accounts (IRAs) — just released — for the first time will allow researchers to more accurately measure IRA assets and ownership across multiple data providers, and to track retirement assets as they move through different types of retirement plans.

For instance, the EBRI IRA DatabaseTM finds that when owners of more than one IRA are identified and their assets are combined, their total IRA balance is about 25 percent higher than the unaggregated account average within the database.

The press release is online here. The full report is published in the September 2010 EBRI Issue Brief, “IRA Balances and Contributions: An Overview of the EBRI IRA Database,” and is online here.

IRA Balance by Type and Gender

The EBRI IRA DatabaseTM is unique in that it can link the accounts of individuals with more than one account in the database, thus aggregating total IRA assets and giving a more realistic picture of their IRA-based retirement savings. Not only will EBRI be able to link individuals within and across data providers in the database, but in the near future it will also be able to link the data with participants in 401(k) plans, allowing retirement funds to be tracked as they are generated, rolled over, and ultimately used. The data security techniques used by data providers assure that EBRI has no ability to identify individuals, so that all privacy is assured.

“IRAs are an incredibly important piece of the retirement puzzle, since they hold the largest single share of the $13 trillion in U.S. retirement assets,” said Craig Copeland, senior research associate at EBRI and author of the study. “This new database will allow us to generate unique and extremely valuable information about how Americans are using IRAs, including rollover IRAs which hold funds that were accumulated in employment-based defined benefit and defined contribution plans, for retirement.”

The full report provides data on the four major types of IRAs, average and mean balances (including by gender), contributions and rollovers, and owners who max out on their IRA contributions.