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A Letter From ICI’s Chief
Economist

2005 Facts at a Glance

ICI Research: Staff and
Publications

SECTION ONE:
Overview of U.S.-Registered
Investment Companies

SECTION TWO:
Recent Mutual Fund
Trends

SECTION THREE:
Exchange-Traded Funds

SECTION FOUR:
Closed-End Funds

SECTION FIVE:
Mutual Fund Fees and
Expenses

SECTION SIX:
Mutual Fund Owners:
Who Are They and
Where Do They
Purchase Fund Shares?

SECTION SEVEN:
The Role of Mutual Funds
in Retirement and
Education Savings

DATA TABLES

APPENDIX A:
How Mutual Funds and
Investment Companies
Operate

APPENDIX B:
ICI Statistical Releases
and Research

GLOSSARY OF TERMS

FACT BOOK ARCHIVE

National policies that have created or enhanced tax-advantaged savings accounts have proven integral to helping Americans prepare for retirement and other long-term savings goals. Because many Americans use mutual funds in tax-advantaged accounts to reach these long-term goals, ICI examines funds’ role in the retirement and education savings markets, and the investors who use IRAs, 401(k) and 529 plans, and other long-term savings vehicles.

Mutual Funds’ Role in Retirement Savings

At year-end 2005, mutual funds accounted for $3.4 trillion, or 24 percent, of the $14.3 trillion U.S. retirement market. The remaining $10.9 trillion of year-end 2005 retirement market assets were managed by pension funds, insurance companies, banks, and brokerage firms.

The $14.3 trillion in retirement market assets is held in a variety of tax-advantaged plan types. The largest components are Individual Retirement Accounts (IRAs) and employer-sponsored defined contribution plans, each holding about $3.7 trillion at year-end 2005. Within employer-sponsored defined contribution plan assets, 401(k) plans held the largest share, $2.4 trillion.

U.S. Retirement Assets Top $14 Trillion

(trillions of dollars, 2005)*

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*Data are preliminary.
Sources: Investment Company Institute and Federal Reserve Board

Other employer-sponsored pensions include private defined benefit pension funds (with $1.8 trillion in assets), state and local government employee retirement plans
(with $2.8 trillion in assets), and federal government defined benefit plans and the federal employees’ Thrift Savings Plan (with $1.1 trillion in assets). In addition, there were $1.4 trillion in annuity reserves at year-end 2005.

The $3.4 trillion in mutual fund retirement assets represented nearly 40 percent of all mutual fund assets at year-end 2005. Retirement savings accounts are a significant portion of long-term mutual fund assets (46 percent), but are a relatively minor share of money market mutual fund assets (13 percent).

Mutual fund retirement assets primarily come from two sources: IRAs and employer-sponsored defined contribution plans, such as 401(k) plans. Investors hold roughly the same amount of mutual fund assets in IRAs as they do in employer-sponsored defined contribution plans. At year-end 2005, IRAs held $1.7 trillion in mutual fund assets and employer-sponsored defined contribution plans had $1.8 trillion.

Mutual Funds and IRAs

IRAs were one of the fastest growing components of the U.S. retirement market between 1990 and 2005, and the mutual fund industry’s share of the IRA market increased from 22 percent in 1990 to 45 percent at year-end 2005.

At year-end 2005, IRA assets totaled $3.7 trillion, up 10 percent from year-end 2004. Mutual fund assets held in IRAs were $1.7 trillion at year-end 2005, an increase of $171 billion, or 11 percent, from 2004. Mutual funds are the largest component of IRA assets, followed by securities held directly through brokerage accounts, which had $1.4 trillion at year-end 2005.

Mutual Fund Retirement Assets

(billions of dollars, 1991–2005)¹

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¹Data are preliminary.
² Employer-sponsored defined contribution plan accounts include 401(k) plans, 403(b) plans, 457 plans, Keoghs, and other defined contribution plans without 401(k) features.
Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute, Federal Reserve Board, Internal Revenue Service Statistics of Income Division, and Department of Labor

Since 1990, assets in IRAs have grown primarily due to the investment performance of the securities held in IRA portfolios and rollovers into IRAs from employer-sponsored retirement plans. Various laws enacted since 1996 introduced new types of IRAs. Furthermore, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), enacted in 2001, increased the amount investors—especially those age 50 or older—can contribute to IRAs. ICI household survey data and Internal Revenue Service Statistics of Income Division tabulations of IRA contributions indicate households have responded to these increased savings opportunities.

For a look at the 30-year evolution of IRAs, see the February 2005 Perspective.

IRA Assets

(billions of dollars, 1990–2005)

Download an Excel file of this data.

¹Bank and thrift deposits include Keogh deposits.
²Life insurance company IRA assets are annuities held by IRAs, excluding variable annuity mutual fund IRA assets, which are included in mutual funds.
³Data are preliminary.
⁴Category excludes mutual fund assets held through brokerage accounts, which are included in mutual funds.
^eData are estimated.
Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute, Federal Reserve Board, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division

Mutual Funds and Defined Contribution Plans

Mutual funds’ share of employer-sponsored defined contribution plan holdings increased from 8 percent in 1990 to 48 percent at year-end 2005. At the end of 2005, employer-sponsored defined contribution plans, which include 401(k) plans, 403(b) plans, 457 plans, Keoghs, and other defined contribution plans, held an estimated $3.7 trillion in assets. Mutual fund assets held in employer-sponsored defined contribution retirement accounts totaled $1.8 trillion in 2005, an increase of
$188 billion, or 12 percent, from 2004.

Mutual Fund Assets by Type of Retirement Plan

(billions of dollars, 2005)¹

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¹Data are preliminary.
²Other defined contribution plans include 457 plans, Keoghs, and other defined contribution plans without 401(k) features.

Among defined contribution plans, 401(k) plans are the largest holder of mutual funds. At year-end 2005, $1.2 trillion, or 70 percent, of mutual fund assets in defined contribution plans were held in 401(k) plans. The second largest defined contribution plan holder of mutual fund assets is 403(b) plans, which held $321 billion in fund assets. These defined contribution plans are tax-deferred retirement plans available to the employees of educational institutions and certain nonprofit organizations. At year-end 2005, 457 plans, which allow deferred compensation by employees of state and local governments and certain tax-exempt organizations, held $59 billion in mutual fund assets. The remaining $158 billion in defined contribution plan mutual fund assets were held by other defined contribution plans.

With $2.4 trillion in assets at year-end 2005, 401(k) plans are the largest component of employer-sponsored defined contribution plan assets. Mutual funds’ share of the 401(k) market increased from 9 percent in 1990 to an estimated 51 percent at year-end 2005.

401(k) Plan Assets Reach $2.4 Trillion

(billions of dollars, 1990–2005)*

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*Data are preliminary.
^eData are estimated.
Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute, Federal Reserve Board, and Department of Labor

Retirement Investor Characteristics

The Institute conducts research tracking demographic information on retirement investors. ICI studies IRA investors and 401(k) plan participants because many of them hold mutual funds in these tax-deferred savings vehicles.

IRA Investors: Traditional, Roth, and Employer-Sponsored IRA Owners

Approximately four out of 10 U.S. households, or 46.8 million, owned IRAs as of mid-2005. IRA households generally are headed by middle-aged individuals with moderate household incomes who are more likely to hold mutual funds, especially long-term mutual funds, in their IRA portfolios than any other type of investment.

As of mid-2005, approximately 37.6 million U.S. households owned “traditional” IRAs—the first type of IRA created (under the Employee Retirement Income Security Act of 1974)—while about 16.1 million U.S. households owned Roth IRAs, first available in 1998. An estimated 8.8 million U.S. households owned employer-sponsored IRAs (SIMPLE IRAs, SEP IRAs, or SAR-SEP IRAs).

Traditional IRA households held a median of $30,000 in their traditional IRAs in 2005, typically in two accounts. Forty-three percent of these households had traditional IRA accounts that included assets “rolled over” from employer-sponsored retirement plans, and 26 percent also owned Roth IRAs. Traditional IRA households tended to have greater financial assets but lower incomes than other types of IRA households. Individuals heading traditional IRA households generally were older and more likely to be retired than individuals heading Roth or employer-sponsored IRA households.

Millions of Households Own IRAs

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Source: Fundamentals, "The Role of IRAs in Americans' Retirement Preparedness"

The majority of Roth IRA households owned one Roth IRA account with a median balance of $10,000 in 2005. About 40 percent of Roth IRA households opened a Roth IRA as their first IRA. Individuals heading Roth IRA households had a median age of 45 years, and 86 percent were employed.

Households with employer-sponsored IRAs had a median of $62,400 invested in all
types of IRAs in 2005. Sixty percent of these households also owned traditional IRAs and 30 percent also owned Roth IRAs. About one in three individuals heading households with employer-sponsored IRAs were self-employed.

For a more detailed look at the current state of the IRA market, see the January 2006 Fundamentals.

Households Invest Their IRAs in Many Types of Assets

(percent of U.S. households owning any type of IRA, 2005)*

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*Multiple responses are included.
Source: Fundamentals, “Appendix: Additional Data on IRA Ownership in 2005”

Mutual funds are the most common IRA investment. More than two-thirds of households owning IRAs have IRA assets invested in mutual funds, usually stock mutual funds. Far fewer hold other types of investments in their IRAs. For example, about two-fifths of households hold individual stocks in IRAs; less than one-third hold annuities; and more than one-quarter hold bank deposits.

401(k) Participants: Asset Allocations, Account Balances, and Loans

For many American workers, 401(k) plan accounts have become an important part of retirement planning. The income these accounts are expected to provide in retirement depends, in part, on the asset allocation decisions of plan participants.

401(k) Asset Allocation Varies With Participant Age

(average asset allocation of 401(k) account balances, percent, 2004)

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Note: Funds include mutual funds and other pooled investments, and components may not add to 100 percent because of rounding.
Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project (Perspective, “Appendix: Additional Figures for the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project for Year-End 2004.”

According to research conducted by ICI and the Employee Benefit Research Institute (EBRI), asset allocation behavior among 401(k) plan participants can vary widely, depending on a variety of factors. For example, younger participants tend to allocate a larger portion of their account balances to equity funds (which include equity mutual funds and other pooled equity investments), while older participants are more likely to invest in fixed-income securities such as guaranteed investment contracts (GICs) and bond funds. On average, at year-end 2004, individuals in their twenties invested 51.6 percent of their assets in equity funds, 13.0 percent in balanced funds, 12.6 percent in company stock, 9.0 percent in bond funds, 6.0 percent in GICs and other stable value funds, and 5.1 percent in money funds. By comparison, individuals in their sixties invested 36.5 percent of their assets in equity funds, 21.0 percent in GICs and other stable value funds, 12.6 percent in company stock, 12.3 percent in bond funds, 9.5 percent in balanced funds, and 4.8 percent in money funds.

401(k) Balances Tend to Increase With Age and Job Tenure

(dollars)

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Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project (Perspective, “Appendix: Additional Figures for the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project for Year-End 2004,”

The median age of 401(k) plan participants was 44 years old at year-end 2004 and the average account balance, excluding plan loans, was $56,878. Account balances tend to be higher the longer 401(k) plan participants have been working for their current employers and the older the participant. Workers in their sixties with at least 30 years of job tenure at their current employers had an average 401(k) account balance of $179,189.

Most 401(k) participants do not borrow from their plans. At year-end 2004, only 19 percent of those eligible for loans had loans outstanding. The average unpaid loan balance for these participants represented about 13 percent of their remaining account balances (net of the unpaid loan balances).

Bulk of Mutual Fund Retirement Assets Invested in Equities

(billions of dollars, 2005)¹

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¹Data are preliminary.
²Other defined contribution plans include 457 plans, Keoghs, and other defined contribution plans without 401(k) features.
Note: Components may not add to the total because of rounding.

Types of Mutual Funds Used by Retirement Plan Investors

Of the $3.4 trillion in mutual fund retirement assets held in IRAs, 401(k) plans, and other retirement accounts at year-end 2005, $2.4 trillion, or 69 percent, were invested in domestic or foreign equity funds. Domestic equity funds alone constituted about $2.0 trillion, or 58 percent, of mutual fund retirement assets. By comparison, about 55 percent of overall fund industry assets—including retirement and nonretirement accounts—were invested in domestic and foreign equity funds at year-end 2005.

At year-end 2005, approximately $604 billion, or 18 percent, of mutual fund retirement assets were invested in fixed-income funds: bond or money market funds. Bond funds held $331 billion, or 10 percent, of mutual fund retirement assets, and money market funds accounted for $273 billion, or 8 percent. The remaining $453 billion, or approximately 13 percent, of mutual fund retirement assets were held in hybrid funds, which invest in a mix of equity and fixed-income securities.

Lifestyle and lifecycle funds, which generally are included in the hybrid fund category, have grown in popularity among investors and retirement plan sponsors in recent years. Lifestyle funds maintain a predetermined risk level and generally use words such as “conservative,” “moderate,” or “aggressive” in their names to indicate the fund’s risk level. Lifecycle funds allow a predetermined reallocation of risk over time to a specified target date, and typically rebalance their portfolios to become more conservative and income-producing by the target date, which is usually indicated in the fund’s name. About $167 billion was invested in lifestyle and lifecycle funds at the end of 2005, with lifestyle funds holding $97 billion of assets and lifecycle funds holding $70 billion. The bulk (90 percent) of lifecycle fund assets were held in retirement accounts, compared to about 59 percent of lifestyle fund assets.

Recent ICI research, based on the EBRI/ICI 401(k) Accumulation Projection Model, examines how 401(k) assets might contribute to retirement income for future retirees.

Lifecycle and Lifestyle Fund Assets Continue to Grow

(billions of dollars, 1996–2005)¹

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¹Data are preliminary.
²A lifecycle mutual fund is a hybrid fund that typically rebalances to an increasingly conservative portfolio as the target date of the fund, which is usually included in the fund’s name, approaches.
³A lifestyle mutual fund is a hybrid fund that maintains a predetermined risk level and generally uses words such as “conservative,” “aggressive,” or “moderate” in the fund’s name.
*Each component is less than $1 billion.
Note: Components may not add to the total because of rounding.

Mutual Funds’ Role in Households’ Education Savings

According to the Federal Reserve Board’s 2004 Survey of Consumer Finances, about 12 percent of all U.S. households consider education as their most important motivation for saving, compared with 11 percent of households in 2001.

In addition, ICI research finds that 30 percent of households owning mutual funds in 2004 cite education as a financial goal for their mutual fund investments. Nevertheless, the demand for education savings vehicles has been historically modest since their introduction in the 1990s, partly because of their limited availability and investors’ lack of familiarity with them. The enactment of EGTRRA in 2001 enhanced the attractiveness of both Section 529 plans and Coverdell Education Savings Accounts (ESAs)—two education savings vehicles—by allowing greater contributions and flexibility in the plans.

Section 529 Savings Plan Assets Continue to Grow

(billions of dollars, 1998–2005)

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Note: Data were estimated for a few individual state observations in order to construct a continuous time series.
Sources: Investment Company Institute and College Savings Plans Network

Assets in Section 529 savings plans grew 32 percent in 2005, increasing from $52.2 billion at year-end 2004 to $68.7 billion by year-end 2005. The number of accounts rose to nearly 6.2 million, and the average account size was approximately $11,000 at year-end 2005.

In the education savings market, mutual funds accounted for an estimated 96 percent of the $68.7 billion Section 529 savings plan market at year-end 2005. Funds also managed $4 billion in Coverdell ESA—formerly Education IRA—assets at year-end 2005.

Households Use Multiple Investments to Save for College

(percent of respondents saving for college, 2003)¹

Download an Excel file of this data.

¹Multiple responses are included.
²Education-targeted savings programs include state-sponsored 529 prepaid tuition plans, state-sponsored 529 college savings plans, and Coverdell ESAs.
Source: Profile of Households Saving for College

A 2003 ICI survey of households with children age 18 or younger found that households use a variety of investments to save for college. Indeed, 93 percent of households saving for college used taxable investments to achieve this financial goal. Forty-two percent of parents saving for college used U.S. Savings Bonds. Twenty percent of parents saving for college used education-targeted savings programs, such as state-sponsored 529 prepaid tuition plans, state-sponsored 529 college savings plans, and Coverdell ESAs. Most of the parents using education-targeted savings programs were also saving for college with taxable investments.