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Letter from the ICI Research: Chapter 1: Chapter 2: Chapter 3: Chapter 5: Chapter 6: Chapter 7: |
The U.S. Retirement SystemIn retirement, Americans rely on a combination of resources including Social Security benefits and income from employer-sponsored retirement plans, individual retirement accounts (IRAs), and annuities. Reliance on each of these components varies by individual. The largest component of retiree income and the predominant income source for lower-income retirees is Social Security benefits. Social Security benefits are funded through a payroll tax equal to 12.4 percent of earnings of covered workers (6.2 percent paid by employees* and 6.2 percent paid by employers) up to a maximum taxable earnings amount ($106,800 in 2010). The Social Security benefit formula is highly progressive, with benefits representing a much higher percentage of earnings for workers with lower lifetime earnings. For individuals born in the 1940s, the Congressional Budget Office (CBO) projects that Social Security benefits will replace, on average, 71 percent of average earnings for the bottom 20 percent of retired workers ranked by lifetime earnings (Figure 7.1). This replacement rate drops to 50 percent for the second quintile of retired workers, and then declines more slowly as lifetime earnings increase. For even the top 20 percent of earners, Social Security benefits are projected to replace a considerable fraction (31 percent) of earnings. Over time, Social Security has become a system designed to be the primary means of support for retirees with low lifetime earnings and a substantial source of income for all retired workers. Social Security Benefit Formula Is Highly Progressive CBO estimates of first-year benefits relative to average indexed earnings by household lifetime earnings, 1940s
Download an Excel file of this data. Source: Congressional Budget Office (CBO’s 2010 Long-Term Projections for Social Security: Additional Information)
Employer-sponsored retirement plans, IRAs, and annuities also play an important role in the U.S. retirement system. Such retirement assets increased to $17.5 trillion at year-end 2010, up 9 percent from year-end 2009 (Figure 7.2). The largest components of retirement assets were IRAs and employer-sponsored defined contribution (DC) plans, holding $4.7 trillion and $4.5 trillion, respectively, at year-end 2010. Other employer-sponsored pensions include private-sector defined benefit (DB) pension funds ($2.2 trillion), state and local government employee retirement plans ($3.0 trillion), and federal government DB plans and the federal employees’ Thrift Savings Plan ($1.4 trillion). In addition, there were $1.6 trillion in annuity reserves outside of retirement plans at year-end 2010. U.S. Retirement Assets Increased in 2010 Trillions of dollars, year-end, selected years
Download an Excel file of this data. 1Other plans include private-sector DB plans; federal, state, and local pension plans; and all fixed and variable annuity reserves at life insurance companies less annuities held by IRAs, 403(b) plans, 457 plans, and private pension funds. Federal pension plans include U.S. Treasury security holdings of the civil service retirement and disability fund, the military retirement fund, the judicial retirement funds, the Railroad Retirement Board, and the foreign service retirement and disability fund. These plans also include securities held in the National Railroad Retirement Investment Trust and Federal Employees Retirement System (FERS) Thrift Savings Plan (TSP).
Seventy percent of U.S. households (or 82 million households) reported that they had employer-sponsored retirement plans, IRAs, or both in May 2010 (Figure 7.3). Sixty-two percent of U.S. households reported that they had employer-sponsored retirement plans—that is, they had assets in DC plan accounts, were receiving or expecting to receive benefits from DB plans, or both. Forty-one percent of households reported having assets in IRAs. Thirty-three percent of households had both IRAs and employer-sponsored retirement plans. Many U.S. Households Had Tax-Advantaged Retirement Savings Percentage of U.S. households, May 2010
Download an Excel file of this data. 1IRAs include traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SIMPLE IRAs, SEP IRAs, and SAR-SEP IRAs).
Ownership of IRA and DC plan assets has become more common with each successive generation of workers. This can be seen by comparing the ownership rates of households grouped by the decade in which the household heads were born (Figure 7.4). At any given age, younger households have had higher ownership rates over time. For example, in 2010, when they were 51 to 60 years of age, 72 percent of households born in the 1950s owned IRAs and DC plan accounts. By comparison, households born a decade earlier had a 64 percent ownership rate when they were aged 52 to 61 in 2001. At younger ages, the differences between birth cohorts are even greater. For example, 70 percent of households with heads born in the 1970s held assets in IRAs or DC plan accounts in 2010 when they were aged 31 to 40. In contrast, those born in earlier decades had lower ownership rates at similar ages. Sixty-five percent of households born in the 1960s owned IRAs or DC plan accounts in 2001, when they were then aged 32 to 41, and 48 percent of households born in the 1950s owned IRAs or DC plan accounts in 1992, when they were aged 33 to 42. Younger Households Have Had Higher and Faster Growing Rates of IRA or Defined Contribution Plan Ownership Percentage of U.S. households owning IRAs or DC plans by decade in which household heads were born, 1989–2010
Download an Excel file of this data. Note: Age is the average age of the 10-year birth cohort at the time of the survey. The 10-year birth cohorts are defined using the age of the head of household. Defined Contribution PlansDC plans provide employees with an account derived from employer or employee contributions or both, plus investment earnings or losses on those contributions, less withdrawals from the plans. Assets in employer-sponsored DC plans have grown more rapidly than assets in other types of employer-sponsored retirement plans over the past quarter century, increasing from 27 percent of employer plan assets in 1985 to 40 percent at year-end 2010. At the end of 2010, employer-sponsored DC plans—which include 401(k) plans, 403(b) plans, 457 plans, Keoghs, and other DC plans—held an estimated $4.5 trillion in assets (Figure 7.5). With $3.1 trillion in assets at year-end 2010, 401(k) plans held the largest share of employer-sponsored DC plan assets. Two types of plans similar to 401(k) plans—403(b) plans, which allow employees of educational institutions and certain nonprofit organizations to receive deferred compensation, and 457 plans, which allow employees of state and local governments and certain tax-exempt organizations to receive deferred compensation—held another $939 billion in assets. The remaining $530 billion in DC plan assets were held by other DC plans without 401(k) features. Defined Contribution Plan Assets by Type of Plan Billions of dollars, year-end, selected years
Download an Excel file of this data. *Other DC plans include Keoghs and other DC plans (profit-sharing, thrift-savings, stock bonus, and money purchase) without 401(k) features. 401(k) Participants: Asset Allocations, Account Balances, and LoansFor many American workers, 401(k) plan accounts have become an important part of their retirement planning. The income these accounts provide in retirement depends, in part, on the asset allocation decisions of plan participants. On average, younger participants allocate a larger portion of their portfolio to equities (which include equity mutual funds and other pooled equity investments; the equity portion of balanced funds, including target date funds; and company stock of their employers). According to research conducted by ICI and the Employee Benefit Research Institute (EBRI), at year-end 2009, individuals in their twenties invested 46 percent of their assets in equity funds and company stock; 35 percent in target date funds and non–target date balanced funds; and 17 percent in guaranteed investment contracts (GICs), stable value funds, money funds, and bond funds (Figure 7.6). All told, participants in their twenties had 73 percent of their 401(k) assets in equities. By comparison, at year-end 2009, individuals in their sixties invested 41 percent of their assets in equity funds and company stock, 15 percent in target date funds and non–target date balanced funds, and 41 percent in GICs, stable value funds, money funds, and bond funds. All told, participants in their sixties had 48 percent of their 401(k) assets in equities. 401(k) Asset Allocation Varied with Participant Age Average asset allocation of 401(k) account balances, percentage of assets, year-end 2009
Download an Excel file of this data. Note: Funds include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product invested primarily in the security indicated. Components may not add to 100 percent because of rounding. Percentages are dollar-weighted averages.
Within age groups, however, portfolio allocation varies widely. For example, at year-end 2009, 54 percent of 401(k) participants in their twenties held more than 80 percent of their account in equities and 17 percent held 20 percent or less (Figure 7.7). Of 401(k) participants in their sixties, 22 percent held more than 80 percent of their account in equities and 29 percent held 20 percent or less. Asset Allocation to Equities Varied Widely Among 401(k) Participants Asset allocation distribution of 401(k) participant account balance to equities, percentage of participants, year-end 2009
Download an Excel file of this data. Note: Equities include equity funds, company stock, and the equity portion of balanced funds. Funds include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product primarily invested in the security indicated. Components may not add to 100 percent because of rounding.
Only in existence since the mid-1990s, target date funds (including both target date mutual funds and other pooled target date investments) have grown rapidly in recent years. A target date fund follows a predetermined reallocation of assets over time based on a specified target retirement date, and typically the fund rebalances its portfolio to become less focused on growth and more focused on income as it approaches and passes the target date, which is usually indicated in the fund’s name. At year-end 2009, target date fund assets represented about 10 percent of total 401(k) assets, up from 5 percent at year-end 2006 (Figure 7.8). Target Date Funds’ 401(k) Market Share Measures of percentage of total 401(k) market, year-end, 2006–2009
Download an Excel file of this data. Note: Funds include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product invested primarily in the security indicated.
The share of 401(k) plans offering target date funds increased to 77 percent in 2009 from 57 percent in 2006, and the share of 401(k) plan participants offered target date funds increased to 71 percent from 62 percent over the same period. Because not all plan participants choose to allocate assets to the funds, the percentage of 401(k) participants with target date fund assets was lower than the percentage of participants who were offered the option. At year-end 2009, 33 percent of 401(k) participants held at least some plan assets in target date funds, up from 19 percent at year-end 2006. In addition, because not all participants with assets in the funds allocated 100 percent of their holdings to the funds, and because participants with assets in the funds were more likely to be younger or recently hired and have lower account balances, the share of 401(k) assets invested in target date funds was lower than the share of participants invested in the funds. Account balances tended to be higher the longer 401(k) plan participants had been working for their current employers and the older the participant. Workers in their sixties with at least 30 years of tenure at their current employers had an average 401(k) account balance of $198,993 (Figure 7.9). The median age of 401(k) plan participants was 45 years at year-end 2009, and the median job tenure was 6 years. 401(k) Balances Tend to Increase with Participant Age and Job Tenure Average 401(k) participant account balance, year-end 2009
Download an Excel file of this data. Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. See ICI Perspective, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2009.”
Most 401(k) participants do not borrow from their plans, although loan activity has edged up in recent years. At year-end 2009, 21 percent of those eligible for loans had loans outstanding. The average unpaid loan balance for these participants represented about 15 percent of their 401(k) account balances (net of the unpaid loan balances). Distributions from Defined Contribution PlansWith DC plans representing an increasing share of household retirement assets, the decisions participants make about distributing those assets in retirement have become an issue of increasing interest to plan sponsors, financial institutions, and policymakers. In late 2007, ICI surveyed recent retirees who had actively participated in DC plans about how they used plan proceeds at retirement. Just over half (52 percent) of surveyed DC plan retirees received all their distributions as lump sums, and another 7 percent received a portion of their distributions as lump sums. The remainder deferred withdrawal (i.e., left their money in their plans), received their distribution as annuities or installment payments, or chose some combination of options that did not include lump sums. Of respondents who received lump-sum distributions, 86 percent of respondents rolled over some or all of the balance to an IRA or otherwise reinvested the assets (Figure 7.10). Indeed, distributions from employer-sponsored retirement plans (of all types) are an important source of funds in IRAs. The remaining 14 percent spent all of the proceeds of the distribution. Because retirees who spent some or all of their lump-sum distributions tended to have lower account balances, only 7 percent of the total dollars distributed as lump sums at retirement were spent immediately. Use of Lump-Sum Distributions from Defined Contribution Plans at Retirement Percentage of respondents*
Download an Excel file of this data. *Based upon respondents’ recall. Responses are from a survey of employees retiring between 2002 and 2007 who were interviewed in the fall of 2007.
Services and Expenses in 401(k) PlansEmployers are confronted with two competing economic pressures: the need to attract and retain quality workers with competitive compensation packages and the need to keep their products and services competitively priced. In deciding whether to offer 401(k) plans to their workers, employers must decide if the benefits of offering a plan (in attracting and retaining quality workers) outweigh the costs of providing the plan and plan services—both the compensation paid to the worker and any other costs associated with maintaining the plan and each individual plan participant account. To provide and maintain 401(k) plans, employers are required to obtain a variety of administrative, participant-focused, regulatory, and compliance services. Employers offering 401(k) plans typically hire service providers to operate these plans, and these providers charge fees for their services. As with any employee benefit, the employer generally determines how the costs will be shared between the employer and employee. Fees can be paid directly by the plan sponsor (i.e., employer), directly by the plan participants (i.e., employees), indirectly by the participants through fees or other reductions in returns paid to the investment provider, or by some combination of these methods (Figure 7.11). A Variety of Arrangements May Be Used to Compensate 401(k) Service Providers
Download an Excel file of this data. Note: In selecting the service provider(s) and deciding the cost-sharing for the 401(k) plan, the employer/plan sponsor will determine which combinations of these fee arrangements will be used in the plan.
Participants in 401(k) plans holding mutual funds tend to invest in lower-cost funds and funds with below-average portfolio turnover. Both characteristics help to keep down the costs of investing in mutual funds through 401(k) plans. For example, at year-end 2009, 27 percent of 401(k) stock mutual fund assets were in funds that had total annual expense ratios below 0.50 percent of fund assets, and another 49 percent had expense ratios between 0.50 percent and 1.00 percent (Figure 7.12). On an asset-weighted basis, the average total expense ratio incurred on 401(k) participants’ holdings of stock mutual funds through their 401(k) plans was 0.74 percent in 2009, compared with an asset-weighted average total expense ratio of 0.86 percent for stock mutual funds industrywide. Similarly, stock mutual funds held in 401(k) accounts tend to have lower turnover in their portfolios. The asset-weighted average turnover rate of stock funds held in 401(k) accounts was 54 percent in 2009, compared with an industrywide asset-weighted average of 64 percent. Fifty-nine percent of 401(k) assets at year-end 2010 were invested in mutual funds. 401(k) Stock Mutual Fund Assets Are Concentrated in Lower-Cost Funds Percentage of 401(k) stock mutual fund assets, year-end 2009
Download an Excel file of this data. *The total expense ratio, which is reported as a percentage of fund assets, includes fund operating expenses and 12b-1 fees.
A Deloitte/ICI study of 130 plan sponsors in late 2008 created and analyzed a comprehensive plan fee measure, the “all-in fee.” The study found a range of fees across 401(k) plans and that a key driver of the all-in fee is plan size. Specifically, plans with more participants and larger average account balances tended to have lower all-in fees than plans with fewer participants and smaller average account balances. This observed effect likely results in part from fixed costs required to start up and run the plan, much of which are driven by legal and regulatory requirements. It appears that economies are gained as a plan grows in size because these fixed costs can be spread over more participants or a larger asset base or both. The Deloitte/ICI study also found that employers that sponsor smaller plans (plans with less than $10 million in assets), on average, paid a larger share of plan fees than employers sponsoring larger plans (plans with $10 million or more in assets). Individual Retirement AccountsIRAs were designed with two goals when they were created in 1974 under the Employee Retirement Income Security Act (ERISA). First, they provide individuals not covered by workplace retirement plans with an opportunity to save for retirement on their own. Second, they allow workers who are leaving jobs a means to preserve the tax benefits and growth opportunities that employer-sponsored retirement plans provide. IRA assets accounted for 27 percent of U.S retirement assets with $4.7 trillion at year-end 2010 (Figure 7.13). Mutual fund assets held in IRAs were $2.2 trillion at year-end 2010, an increase of $248 billion, or 13 percent, from year-end 2009. Assets managed by mutual funds were the largest component of IRA assets, followed by securities held through brokerage accounts ($1.7 trillion at year-end 2010). The mutual fund industry’s share of the IRA market was 47 percent at year-end 2010, compared with 46 percent at year-end 2009. IRA Assets Billions of dollars, year-end, selected years
Download an Excel file of this data. 1Category excludes mutual fund assets held through brokerage accounts, which are included in mutual funds.
Since 1990, assets in IRAs have grown primarily due to the investment performance of the securities held in IRA portfolios and rollovers into traditional IRAs from employer-sponsored retirement plans. Although they represent only a small portion of the overall IRA market, assets in two new types of IRAs—SIMPLE IRAs and Roth IRAs—have grown rapidly since they were introduced in the late 1990s. IRA InvestorsMore than four out of 10 U.S. households, or 49 million, owned IRAs as of mid-2010 (Figure 7.14). Traditional IRAs—defined as those IRAs first allowed under ERISA—were the most common type of IRA, owned by 39 million U.S. households. Roth IRAs, first made available in 1998 under the Taxpayer Relief Act of 1997, were owned by 20 million U.S. households in mid-2010. Over 9 million U.S. households owned employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, or SIMPLE IRAs). 49 Million U.S. Households Owned IRAs May 2010
Download an Excel file of this data. Note: Households may own more than one type of IRA. SIMPLE IRAs, SEP IRAs, and SAR-SEP IRAs are employer-sponsored IRAs. Although most U.S. households were eligible to make contributions to IRAs, few did so. Only 15 percent of U.S. households contributed to any type of IRA in tax year 2009. In addition, very few eligible households made “catch-up” contributions to traditional or Roth IRAs. Instead, investment returns and rollovers from employer-sponsored retirement plans have fueled the growth of IRAs. In any given year, a small portion of traditional IRA investors makes rollovers, but analysis of The IRA Investor DatabaseTM finds that it is largely a different group that make rollovers year-to-year. For example, of investors with IRAs at year-end 2008, 21 percent had made a rollover in 2007 or 2008, with 11 percent making a rollover in 2008, 11 percent in 2007, and only 1 percent in both years (Figure 7.15). The proportion of IRA owners that have ever made a rollover is higher because typically different investors make rollovers each year. Of U.S. households owning traditional IRAs in May 2010, an ICI household survey found that 55 percent (or 21 million U.S. households) had traditional IRAs that included rollover assets (Figure 7.16). In their most recent rollover, the vast majority of these households (85 percent) transferred their entire retirement plan balances into traditional IRAs. Rollover Activity in The IRA Investor Database™ Percentage of traditional IRA investors aged 25 to 74, 2008
Download an Excel file of this data. Source: The IRA Investor Database™ Rollovers Are Often a Source of Assets for Traditional IRA Investors Percentage of households owning traditional IRAs, May 2010
Download an Excel file of this data. Source: ICI Fundamentals, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2010”
Households owning IRAs generally are headed by middle-aged individuals (median age 51 years) with moderate household incomes (median income $73,000). These households held a median of $36,000 in IRAs. In addition, many households held multiple types of IRAs. For example, 32 percent of households with traditional IRAs also owned Roth IRAs, and 14 percent also owned employer-sponsored IRAs. IRA owners are more likely to hold mutual funds, especially long-term mutual funds, in their IRA portfolios than any other type of investment (Figure 7.17). Sixty-three percent of IRA-owning households had IRA assets invested in mutual funds, with about three-quarters of these households holding at least a portion of their balance in stock mutual funds. Far fewer households owned other types of investments in their IRAs: 36 percent held individual stocks, 28 percent held annuities, and 25 percent held bank deposits. Households Invested Their IRAs in Many Types of Assets Percentage of U.S. households owning IRAs, May 2010*
Download an Excel file of this data. *Multiple responses are included.
Distributions from IRAsOf households with traditional IRAs in May 2010, 15 percent took withdrawals in tax year 2009 (Figure 7.18). The share of traditional IRA owners who took withdrawals was down substantially from the previous year’s survey, which found that 19 percent took withdrawals in tax year 2008. The lower withdrawal rate in part can be attributed to the temporary suspension of required minimum distributions (RMDs) during the 2009 tax year. An RMD is a distribution equal to a percentage of the IRA account balance, with the percentage based on remaining life expectancy. Traditional IRA owners aged 70½ or older must withdraw the minimum amount each year or pay a penalty for failing to do so. Typically, withdrawals from traditional IRAs are taken to fulfill RMD requirements. For example, 64 percent of individuals who took withdrawals in tax year 2008 stated they did so to meet the RMD requirements. In fact, even though the rules were suspended in tax year 2009, 48 percent cited RMD requirements as the reason for their withdrawals. Withdrawals from traditional IRAs were typically modest: the median withdrawal in tax year 2009 was $7,500 and 39 percent of withdrawals totaled less than $5,000 (Figure 7.18). The median ratio of withdrawals to account balance was 8 percent. Withdrawals from Traditional IRAs Are Infrequent
Download an Excel file of this data. 1The household was considered retired if either the head of household or spouse responded affirmatively to “are you retired from your
Of the 15 percent of households who reported taking withdrawals in tax year 2009, 73 percent reported that the head of household or the spouse or both were retired. Of retired households that took traditional IRA withdrawals in tax year 2009, 50 percent reported using some or all of the funds to pay for living expenses (Figure 7.19). Other uses included reinvesting or saving the withdrawal amount in another account (28 percent), using the withdrawal for a healthcare expense (16 percent), and using the withdrawal for a home purchase, repair, or remodeling (14 percent). Because current withdrawal activity may not be a good indicator of future withdrawal activity, ICI also asked about plans for future traditional IRA withdrawals. Among traditional IRA–owning households in 2010 that did not take a withdrawal in tax-year 2009, 59 percent said that they were not likely to take a withdrawal before age 70½. The top two expected future uses of traditional IRA withdrawals were to pay for living expenses (mentioned by 67 percent of traditional IRA–owning households in 2010 that did not take withdrawals in tax year 2009) and to pay for emergencies (mentioned by 64 percent). Traditional IRA Withdrawals Among Retirees Are Often Used to Pay for Living Expenses Percentage of traditional IRA–owning households1 in which either the head of household or spouse is retired, May 2010
Download an Excel file of this data. 1The base of respondents includes the 16 percent of traditional IRA–owning households that were retired and took withdrawals reported in Figure 7.18. The Role of Mutual Funds in Households’ Retirement SavingsAt year-end 2010, mutual funds accounted for $4.7 trillion, or 27 percent, of the $17.5 trillion U.S. retirement market. The $4.7 trillion in mutual fund retirement assets represented 40 percent of all mutual fund assets at year-end 2010. Retirement savings accounts were a significant portion of long-term mutual fund assets (48 percent), but were a relatively minor share of money market fund assets (13 percent). Similarly, as a share of households’ mutual fund holdings, mutual fund assets held in DC plans and IRAs represented 51 percent of household long-term mutual funds, but only 19 percent of household money market funds (Figure 7.20). Households’ Mutual Fund Assets by Type of Account Billions of dollars, year-end 2010
Download an Excel file of this data. 1Mutual funds held as investments in 529 plans and Coverdell ESAs are counted in this category.
Retirement assets invested in mutual funds primarily come from two sources: IRAs and employer-sponsored DC plans, such as 401(k) plans. Investors held slightly more mutual fund assets in DC plans than they held in IRAs. At year-end 2010, IRAs held $2.2 trillion in mutual fund assets, and employer-sponsored DC plans had $2.5 trillion (Figure 7.21). Among DC plans, 401(k) plans were the largest holder of mutual funds, with $1.8 trillion in assets. At year-end 2010, 403(b) plans held $365 billion in mutual fund assets, 457 plans held $75 billion, and other DC plans held $223 billion. Bulk of Mutual Fund Retirement Account Assets Was Invested in Equities Billions of dollars, year-end 2010
Download an Excel file of this data. 1Hybrid funds invest in a mix of equities and fixed-income securities. The bulk of target date and lifestyle funds is counted in this category.
Types of Mutual Funds Used by Retirement Plan InvestorsFifty-nine percent of the $4.7 trillion in mutual fund retirement assets held in IRAs, 401(k) plans, and other retirement accounts at year-end 2010 were invested in domestic or foreign equity funds (Figure 7.21). By comparison, about 48 percent of overall fund industry assets—including retirement and nonretirement accounts—were invested in domestic or foreign equity funds at year-end 2010. Domestic equity funds alone constituted about $2.1 trillion, or 44 percent, of mutual fund retirement assets. At year-end 2010, 23 percent of mutual fund retirement assets were invested in bond funds and money market funds. Bond funds held $710 billion, or 15 percent, of mutual fund retirement assets, and money market funds accounted for $351 billion, or 7 percent. The remaining $878 billion, or approximately 19 percent, of mutual fund retirement assets were held in hybrid funds, which invest in a mix of equity, bond, and money market securities. Target Date and Lifestyle Mutual FundsTarget date and lifestyle mutual funds, generally included in the hybrid fund category, have grown in popularity among investors and retirement plan sponsors over the past decade. As previously described, a target date fund follows a predetermined reallocation of assets over time based on a specified target retirement date, and typically the fund rebalances its portfolio to become less focused on growth and more focused on income as it approaches and passes the target date, which is usually indicated in the fund’s name. A lifestyle fund maintains a predetermined risk level and generally uses words such as “conservative,” “moderate,” or “aggressive” in its name to indicate the fund’s risk level. Assets in target date and lifestyle mutual funds totaled $604 billion at the end of 2010 (Figure 7.22), up from $487 billion at year-end 2009. Target date mutual funds’ assets were up 33 percent in 2010, increasing from $256 billion to $340 billion. Assets of lifestyle mutual funds were up 14 percent in 2010, rising from $231 billion to $264 billion. The bulk (91 percent) of target date mutual fund assets was held in retirement accounts, compared with 43 percent of lifestyle mutual fund assets. Target Date and Lifestyle Mutual Fund Assets by Account Type Billions of dollars, year-end, 2000–2010 Download an Excel file of this data. 1A target date mutual fund typically rebalances its portfolio to become less focused on growth and more focused on income as it approaches and passes the target date of the fund, which is usually included in the fund’s name. The Role of Mutual Funds in Households’ Education SavingsICI research finds that 25 percent of households that owned mutual funds in 2010 cited education as a financial goal for their 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 the Economic Growth and Tax Relief Reconciliation Act (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. The enactment of the Pension Protection Act (PPA) in 2006 made permanent the EGTRRA enhancements to Section 529 plans. The enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended for two years the EGTRRA enhancements to Coverdell ESAs. Assets in Section 529 savings plans increased 18 percent in 2010, with $138.2 billion in assets at the end of 2010, up from $116.9 billion at year-end 2009 (Figure 7.23). As of year-end 2010, the number of accounts was 9.5 million, and the average account size was approximately $14,500. Section 529 Savings Plan Assets Billions of dollars, year-end, 2000–2010
Download an Excel file of this data. Note: Data were estimated for a few individual state observations in order to construct a continuous time series.
In 2010, as a group, households saving for college through 529 plans, Coverdell ESAs, or mutual funds held outside of these accounts tended to be headed by younger individuals, with 57 percent younger than 45 years of age (Figure 7.24). Heads of households saving for college had a range of educational attainment: 49 percent had not completed college and 51 percent had college degrees or higher education. In addition, these households represented a range of incomes: 40 percent had household income less than $75,000; 18 percent earned between $75,000 and $99,999; and 42 percent had household incomes of $100,000 or more. Nearly 70 percent of these households had children (younger than 18) in the home and 45 percent had more than one child in the home. Characteristics of Households Saving for College Percentage of U.S. households saving for college,1 May 2010
Download an Excel file of this data. 1Households saving for college are households that own education savings plans (Coverdell ESAs or 529 plans) or responded that paying for education was one of their financial goals for their mutual funds.
*For 2011, this rate has been temporarily changed to 4.2 percent.
For More Information
Available at www.ici.org. |
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