2018 Investment Company Fact Book
A Review of Trends and Activities in the Investment Company Industry

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Chapter Eight

US Retirement and Education Savings

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 goals, ICI studies the US retirement market; the investors who use 401(k) plans, IRAs, 529 plans, and other tax-advantaged savings vehicles; and the role of mutual funds in the retirement and education savings markets.

The US Retirement System

American households rely on a combination of resources in retirement, and the role each type of resource plays has changed over time and varies across households. The traditional analogy compares retirement resources to a three-legged stool, with resources divided equally among the legs—Social Security, employer-sponsored pension plans, and private savings. Americans’ retirement resources, however, are best thought of as a five-layer pyramid.

Retirement Resource Pyramid

The retirement resource pyramid has five layers, which draw from government programs, compensation deferred until retirement, and other savings (Figure 8.1):

  • Social Security
  • homeownership
  • employer-sponsored retirement plans (private-sector and government employer plans, including both defined benefit [DB] and defined contribution [DC] plans)
  • individual retirement accounts (IRAs), including rollovers
  • other assets

Though the use of each layer differs by household, together they have broadly enabled recent generations of retirees to maintain their standard of living in retirement.

Figure 8.1

Retirement Resource Pyramid

   

Source: Investment Company Institute, The Success of the US Retirement System

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The construction of each household’s retirement pyramid varies with income. For example, lower-income households tend to rely more on Social Security, reflecting the fact that Social Security benefits replace a higher share of pre-retirement earnings for workers with lower lifetime earnings.

The amount and composition of retirement resources also change with age. Younger households are more likely to save primarily for reasons other than retirement, such as a home purchase, family needs, or education (Figure 8.2). By contrast, older households are more likely to save primarily for retirement, as many already have reached their other savings goals. The tendency of younger workers to focus less on saving for retirement is consistent with economic models of life-cycle consumption predicting that most workers delay saving for retirement until later in their careers.

Figure 8.2

Primary Reason for Household Saving Changes with Age

Percentage of households by age of household head, 2016

   

Source: Investment Company Institute tabulations of the 2016 Federal Reserve Board Survey of Consumer Finances

Social Security, the base of the US retirement resource pyramid, is the largest component of retiree income and the primary source of income for lower-income retirees. 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 ($127,200 in 2017). The benefit formula is highly progressive, with benefits representing a much higher percentage of earnings for workers with lower lifetime earnings.

By design, Social Security is the primary means of support for retirees with low lifetime earnings and a substantial source of income for all retired workers. The Congressional Budget Office (CBO) estimates that, for those in the lowest quintile (20 percent) of households ranked by lifetime household earnings, first-year Social Security benefits will replace 83 percent of inflation-indexed lifetime earnings, on average, for workers born in the 1960s who claim benefits at age 65 (Figure 8.3). That replacement rate drops to 64 percent for workers in the second quintile of households, and then declines more slowly as lifetime household earnings increase. Even for workers in the top 20 percent of households, Social Security benefits are projected to replace a considerable portion (33 percent) of earnings.

Figure 8.3

Social Security Benefit Formula Is Highly Progressive

Average scheduled Social Security replacement rates for workers in the 1960s birth cohort by quintile of lifetime household earnings, percent

   

Note: The replacement rate is the ratio of Social Security benefits net of income tax to average inflation-indexed lifetime earnings. Replacement rates are for workers claiming benefits at age 65. For workers born in the 1960s, the Social Security full benefit retirement age is 67. If these workers claimed benefits at age 67, benefits would increase by about 15 percent.

Source: Congressional Budget Office, CBO’s 2017 Long-Term Projections for Social Security: Additional Information

For many near-retiree households, homeownership is the second most important retirement resource after Social Security. Older households are more likely to own their homes and more likely to have fully—or at least, largely—paid down any mortgage. Retired households typically benefit from this resource simply by living in their homes rent-free.

Employer-sponsored retirement plans and IRAs, which complement Social Security benefits and are important resources for households regardless of income or wealth, increase in importance for households for whom Social Security replaces a smaller share of earnings. In 2016, eight out of 10 near-retiree households had accrued benefits in employer-sponsored retirement plans—DB and DC plans sponsored by private-sector and government employers—or IRAs (Figure 8.4).

Figure 8.4

Near-Retiree Households Across All Income Groups Have Retirement Assets,
DB Plan Benefits, or Both

Percentage of near-retiree households1 by income quintile,2 2016

   

1 Near-retiree households are those with a head of household aged 55 to 64, and a working head of household or working spouse.

2 Income is household income before taxes in 2015.

3 Households currently receiving DB plan benefits and households with the promise of future DB plan benefits, whether from private-sector or government employers, are counted in this category.

4 Retirement assets include DC plan assets (401(k), 403(b), 457, thrift, and other DC plans), whether from private-sector or government employers, and IRAs (traditional, Roth, SEP, SAR-SEP, and SIMPLE).

Note: Components may not add to the total because of rounding.

Source: Investment Company Institute tabulations of the 2016 Federal Reserve Board Survey of Consumer Finances

Finally, although less important on average, retirees also rely on other assets in retirement. These assets can be financial—including bank deposits, stocks, bonds, and mutual funds owned outside employer-sponsored retirement plans and IRAs. They also can be nonfinancial—including business equity, investment real estate, second homes, vehicles, and consumer durables (long-lived goods such as household appliances and furniture). Higher-income households are more likely to have large holdings of assets in this category.

Snapshot of US Retirement Market Assets

Employer-sponsored retirement plans (DB and DC plans sponsored by private-sector and government employers), IRAs (including rollovers), and annuities play an important role in the US retirement system, with assets totaling $28.2 trillion at year-end 2017, up 11.2 percent from $25.4 trillion at year-end 2016 (Figure 8.5). The largest components of retirement assets were IRAs and employer-sponsored DC plans, which together represent 60 percent of all retirement market assets. Other employer-sponsored plans include private-sector DB pension plans ($3.1 trillion), state and local government DB retirement plans ($4.3 trillion), and federal government DB plans ($1.7 trillion). In addition, annuity reserves outside of retirement plans were $2.2 trillion at year-end 2017 (Figure 8.6).

Figure 8.5

Total US Retirement Market Assets

Trillions of dollars; year-end, selected years

   

1 Other retirement assets includes private-sector DB plans; federal, state, and local government DB plans; and all fixed and variable annuities held outside retirement plans and IRAs. Federal pension plans include US 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.

2 DC plans include private employer-sponsored DC plans (including 401(k) plans), 403(b) plans, 457 plans, and the Federal Employees Retirement System (FERS) Thrift Savings Plan (TSP).

3 IRAs include traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs).

e Data are estimated.

Note: Components may not add to the total because of rounding.

Sources: Investment Company Institute, Federal Reserve Board, Department of Labor, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division. See Investment Company Institute, “The US Retirement Market, Fourth Quarter 2017.”

Retirement assets include individual account-based savings (IRAs and DC plans) and assets held in DB plans. Traditional DB plans promise to pay benefits in retirement typically based on salary and years of service. Some DB plans, however, do not have sufficient assets to cover promised benefits that households have a legal right to expect. The total unfunded liabilities of DB plans were $3.6 trillion at year-end 2017 (Figure 8.6), and underfunding is more pronounced in government-sector pension plans. As of year-end 2017, state and local government DB plans had $4.3 trillion in assets and $1.6 trillion in unfunded liabilities, and federal DB plans had $1.7 trillion in assets, which covered less than half of their liabilities. By comparison, private-sector DB plans had $3.1 trillion in assets and $0.2 trillion in unfunded liabilities.

Figure 8.6

Total US Retirement Assets and Unfunded Defined Benefit Plan Liabilities

Trillions of dollars, year-end 2017

   

e Data are estimated.

Sources: Investment Company Institute and Federal Reserve Board. See Investment Company Institute, “The US Retirement Market, Fourth Quarter 2017.”

Ownership of Retirement Resources

Many US households have accumulated resources earmarked for retirement (Figure 8.7). Across all age groups, 61 percent of US households (77 million) reported that they had employer-sponsored retirement plans, IRAs, or both in mid-2017. Fifty-five percent of US 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. Thirty-five percent reported having assets in IRAs, including 29 percent who had both IRAs and employer-sponsored retirement plans. US households represent a wide range of ages, at different points in the life cycle of savings. Focus on retirement savings tends to increase with age (Figure 8.2), and older households are more likely to have retirement resources; for example, about eight out of 10 near-retiree households have retirement accumulations (Figure 8.4).

Figure 8.7

Many US Households Have Retirement Resources Outside Social Security

Percentage of US households, mid-2017

   

1 IRAs include traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs).

2 Employer-sponsored retirement plans include DC and DB retirement plans.

Sources: Investment Company Institute and US Census Bureau. See ICI Research Perspective, “The Role of IRAs in US Households’ Saving for Retirement, 2017.”

US Retiree Income

Most American workers maintain or increase their spendable income after claiming Social Security, according to a new study coauthored by Investment Company Institute and Internal Revenue Service Statistics of Income Division staff. The study also finds that, after claiming, most get substantial amounts of both Social Security benefits and retirement income (from employer-sponsored retirement plans, annuities, or IRAs).

Lower-income workers typically had higher replacement rates of spendable income—income available after paying taxes and making contributions to retirement accounts (Figure 8.8). Three years after claiming, the median worker in the study had spendable income that was greater (103 percent) than spendable income in the year before claiming. Notably, median replacement rates were found to be highest for individuals in the lowest quintile of income in 1999 (123 percent) and lowest for individuals in the highest quintile (93 percent).

Figure 8.8

Most Workers Maintain Spendable Income After Claiming Social Security

Median spendable income replacement rate1 three years after claiming Social Security among individuals in the sample2 by 1999 per capita income,3 percent

1 Spendable income is the sum of labor income, Social Security benefits, and retirement income (DB and DC pension, annuity, and IRA income) less payroll taxes and a proportional amount of federal income taxes. The replacement rate is expressed as a percentage of spendable income in the year before Social Security was claimed.

2 Sample consists of all working taxpayers aged 55 to 61 in 1999 who claimed Social Security retirement benefits between 2000 and 2007.

3 For individuals filing a non-joint return, per capita income is income reported on the tax return. For married individuals filing a joint return, per capita income is income reported on the tax return divided by two.

Source: Using Panel Tax Data to Examine the Transition to Retirement, available at www.ici.org/transition_to_retirement

In addition to Social Security, the vast majority of workers analyzed had resources from employer-sponsored retirement plans, annuities, and IRAs (Figure 8.9). Over the five-year period from one year before an individual claims Social Security to three years after claiming, 81 percent received income—either directly or through a spouse—from employer plans, annuities, or IRAs. Another 8 percent had evidence of these resources—a Form 1099-R (reporting a rollover or other retirement account transaction that did not generate income), a Form 5498 (indicating IRA ownership), or both—but were not yet drawing on them.

Figure 8.9

Nearly Nine in 10 Had Retirement Resources Outside of Social Security

Percentage of sample1 who had evidence of retirement resources outside of Social Security,2 by 1999 per capita income3

1 Sample consists of all working taxpayers aged 55 to 61 in 1999 who claimed Social Security retirement benefits between 2000 and 2007.

2 The period analyzed is the five-year period starting one year prior to claiming Social Security and ending three years after claiming.

3 For individuals filing a non-joint return, per capita income is income reported on the tax return. For married individuals filing a joint return, per capita income is income reported on the tax return divided by two.

4 Retirement income is income from DB and DC pensions, annuities, and IRAs.

Note: Components may not add to the total because of rounding.

Source: Using Panel Tax Data to Examine the Transition to Retirement, available at www.ici.org/transition_to_retirement

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Defined Contribution Retirement Plans

DC plans provide employees with a retirement account funded with employer contributions, employee contributions, or both, plus investment earnings or losses on those contributions, less withdrawals. Assets in employer-sponsored DC plans have grown faster than assets in DB plans over the past three decades, increasing from 28 percent of total DC and DB plan assets in 1987 to 46 percent at year‑end 2017.

At the end of 2017, employer-sponsored DC plans—which include 401(k) plans, 403(b) plans, 457 plans, the federal Thrift Savings Plan (TSP), and other private-sector DC plans—held an estimated $7.7 trillion in assets (Figure 8.10). With $5.3 trillion in assets at year-end 2017, 401(k) plans held the largest share of employer-sponsored DC plan assets. 403(b) plans—which are similar to 401(k) plans and are offered by educational and certain nonprofit organizations—held another $1.0 trillion in assets. In addition, 457 plans—which serve employees of state and local governments and certain tax-exempt organizations—and the federal Thrift Savings Plan (TSP) held a total of $0.9 trillion. Other private‑sector DC plans without 401(k) features held the remaining $0.5 trillion.

Figure 8.10

Defined Contribution Plan Assets by Type of Plan

Trillions of dollars; year-end, selected years

   

* Other private-sector DC plans includes private-sector DC plans (profit-sharing, stock bonus, and money purchase) without 401(k) features.

Note: Components may not add to the total because of rounding.

Sources: Investment Company Institute, Federal Reserve Board, Department of Labor, National Association of Government Defined Contribution Administrators, and American Council of Life Insurers. See Investment Company Institute, “The US Retirement Market, Fourth Quarter 2017.”

401(k) and 403(b) Plan Design and Investment Lineup

Plan Design

Employers that sponsor a 401(k) plan have the option to include features such as employer contributions, access to plan assets through participant loans, and automatic enrollment of employees into the plan to encourage participation. The most common of these plan features is employer contributions. In 401(k) plans, employers can make contributions without regard to employee contributions or by using a matching structure that gives employees an incentive to contribute to the plan. Recent analysis of large 401(k) plans found that nearly nine out of 10 (87 percent) made employer contributions in plan year 2015 (Figure 8.11). More than eight out of 10 (82 percent) large 401(k) plans had participant loans outstanding, and nearly three out of 10 (29 percent) included automatic enrollment in 2015. An analysis of large 403(b) plans found that they are similarly likely to have employer contributions but less likely to have loans outstanding or automatic enrollment.

Figure 8.11

Large 401(k) Sponsors Use a Variety of Plan Designs

Percentage of plans with selected plan activity combinations, 2015

   

Note: The sample is 52,612 plans with $3.7 trillion in assets. The results include plans that filed Form 5500 Schedule H (typically plans with 100 participants or more) and had $1 million or more in plan assets and exclude 403(b) plans with a 401(k) feature. A plan was determined to allow participant loans if any participant had a loan outstanding at the end of plan year 2015.

Source: Investment Company Institute tabulations of Department of Labor Form 5500 data. See BrightScope and Investment Company Institute, The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2015

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The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2015

When designing 401(k) plans, employers tend to select a combination of features that their employees are likely to value. In 2015, nearly half (49 percent) of large 401(k) plans had both employer contributions and participant loans outstanding but no automatic enrollment, making this the most common combination of plan activities (Figure 8.11). The next most common plan design combined all three activities—employer contributions, automatic enrollment, and outstanding loans—and was offered by 23 percent of large 401(k) plans, followed by 13 percent having employer contributions only. About 2 percent of large 401(k) plans did not report any of the three activities.

Investment Lineup

In addition to choosing how to structure contributions to the 401(k) plan, employers also select the investment options that are available to plan participants. In 2015, domestic equity funds, international equity funds, and domestic bond funds were offered in nearly all large 401(k) plans (Figure 8.12). Although these three fund types are equally likely to be offered, when these funds are available in the plan, employers tend to offer more domestic equity funds (10 funds on average) than domestic bond funds (three funds) or international equity funds (three funds). Target date funds also are common investment choices, with about 80 percent of large 401(k) plans offering 10 of these funds on average. In addition, about half of large 401(k) plans offered one money fund on average and 75 percent offered one guaranteed investment contract (GIC). In total, the average large 401(k) plan offered 29 funds to participants in 2015. Large private-sector 403(b) plans also offer participants a diverse array of investment options to choose from.

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401(k) Resource Center

Figure 8.12

Incidence of Investment Options Offered in Large 401(k) Plans by Type of Investment

Percentage of plans with audited 401(k) filings in the BrightScope database, 2015

   

1 The Investment Company Institute classifies balanced funds as hybrid in its data.

2 A target date 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.

3 Other includes commodity funds, real estate funds, and individual stocks (including company stock) and bonds.

Note: The sample is 19,422 plans with 41.5 million participants and $3.3 trillion in assets. Participant loans are excluded. Funds include mutual funds, collective investment trusts, separate accounts, and other pooled investment products. BrightScope audited 401(k) filings generally include plans with 100 participants or more. Plans with fewer than four investment options, more than 100 investment options, or less than $1 million in plan assets are excluded from BrightScope audited 401(k) filings for this analysis.

Source: BrightScope Defined Contribution Plan Database. See BrightScope and Investment Company Institute, The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2015.

401(k) Participants: Asset Allocation, Account Balances, and Loan Activity

Asset Allocation

The income that 401(k) plan accounts provide in retirement depends, in part, on the asset allocation decisions of plan participants.

On average, younger participants allocate more of their portfolios to equities compared with older participants. According to research conducted by ICI and the Employee Benefit Research Institute (EBRI), at year-end 2015, participants in their twenties had about 80 percent of their 401(k) assets invested in equities, on average, while those in their sixties had investments in equities amounting to 55 percent of their 401(k) assets (Figure 8.13). 401(k) plans can offer investment in equities through equity mutual funds and other pooled equity investments, the equity portion of balanced funds (including target date funds), and employer company stock.

EBRI/ICI research also finds differences between younger and older participants in the places where they hold equities. At year-end 2015, on average, 401(k) plan participants in their twenties had 28 percent of their 401(k) assets invested in equity funds, 47 percent in target date funds, 8 percent in non–target date balanced funds, and 5 percent in company stock (Figure 8.13). By comparison, older 401(k) plan participants had higher allocations to equity funds (38 percent of their 401(k) assets), lower allocations to target date funds (17 percent), and similar allocations to non–target date balanced funds (6 percent) and company stock (6 percent). These older participants also had higher allocations to fixed-income investments. At year-end 2015, on average, 401(k) plan participants in their sixties had about one-quarter of their 401(k) account assets in money funds, bond funds, and GICs and other stable value funds, while participants in their twenties allocated a much lower 8 percent to those investments, on average.

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Target Retirement Date Funds Resource Center

Figure 8.13

401(k) Asset Allocation Varies with Participant Age

Average asset allocation of 401(k) account balances, percentage of account balances, year-end 2015

   

1 A target date 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.

2 The Investment Company Institute classifies balanced funds as hybrid in its data.

3 Equities include equity funds, company stock, and the equity portion of balanced funds.

Note: Funds include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product primarily invested in the security indicated. percentages are dollar-weighted averages.

Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. See ICI Research Perspective, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2015.”

Portfolio allocation also varies widely within age groups. At year-end 2015, 75 percent of 401(k) participants in their twenties held more than 80 percent of their account in equities, while participants in their sixties were much less inclined to hold such high equity allocations (only 21 percent of them did so) (Figure 8.14). By comparison, 9 percent of those in their twenties and 33 percent of those in their sixties allocated 40 percent or less of their account to equities.

Figure 8.14

Asset Allocation to Equities Varies Widely Among 401(k) Plan Participants

Asset allocation distribution of 401(k) participant account balance to equities, percentage of participants, year-end 2015

   

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 invested primarily in the security indicated. The Investment Company Institute classifies balanced funds as hybrid in its data.

Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. See ICI Research Perspective, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2015.”

Target Date Funds

Target date funds, introduced in the mid-1990s, have grown rapidly in recent years. A target date fund (including both target date mutual funds and other pooled target date investments) follows a predetermined reallocation of assets over time based on a specified target retirement date. 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.

Target date funds still make up a relatively small portion of 401(k) assets, but they have grown rapidly in recent years—from 5 percent at year-end 2006 to 20 percent at year-end 2015 (Figure 8.15). The share of 401(k) plans that offer target date funds and the share of 401(k) plan participants offered target date funds also have increased. At year-end 2015, 65 percent of 401(k) plans offered target date funds, and 74 percent of 401(k) plan participants were offered target date funds. Participant use of target date funds also has increased and 50 percent of 401(k) plan participants in 2015 held these funds—up from less than 20 percent in 2006.

Figure 8.15

Target Date Funds’ 401(k) Market Share

Percentage of total 401(k) market; year-end, 2006 and 2015

   

Note: Funds include mutual funds, bank collective trusts, life insurance separate accounts, and other pooled investment products.

Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. See ICI Research Perspective, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2015.”

Account Balances

Account balances tend to be higher the longer 401(k) plan participants have been working for their current employers and the older the participant. Participants in their sixties with more than 30 years of tenure at their current employer had an average 401(k) plan account balance of $281,000 at year-end 2015 (Figure 8.16). Participants in their forties with 10 to 20 years of tenure at their current employer had an average 401(k) plan account balance of $114,600. The median 401(k) plan participant was 45 years old at year-end 2015, and the median job tenure was eight years.

Figure 8.16

401(k) Plan Balances Tend to Increase with Participant Age and Job Tenure

Average 401(k) plan account balance by participant age and tenure, 2015

   

Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. See ICI Research Perspective, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2015.”

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Individual Retirement Account Resource Center

Loan Activity

Most 401(k) participants do not borrow from their plans, although the majority have access to loans. At year-end 2015, 18 percent of participants eligible for loans had loans outstanding, down from 20 percent one year earlier. Not all participants, however, have access to 401(k) plan loans—factoring in all 401(k) participants with and without loan access in the EBRI/ICI 401(k) database, only 16 percent had loans outstanding at year-end 2015. Unpaid loan balances among participants with loans averaged about 12 percent of the remaining 401(k) account balance. In aggregate, US Department of Labor data indicate that outstanding loan amounts were less than 2 percent of 401(k) plan assets in 2015.

Individual Retirement Accounts

The first type of IRA—known as a traditional IRA—was created under the Employee Retirement Income Security Act of 1974 (ERISA). IRAs provide all workers with a contributory retirement savings vehicle and, through rollovers, give workers leaving jobs a means to preserve the tax benefits and growth opportunities that employer-sponsored retirement plans provide. Roth IRAs, first available in 1998, were created to provide a contributory retirement savings vehicle on an after-tax basis with qualified withdrawals distributed tax-free. In addition, policymakers have added employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs) to encourage small businesses to provide retirement plans by simplifying the rules applicable to tax-qualified plans.

IRA assets totaled $9.2 trillion at year-end 2017, accounting for 33 percent of US retirement assets (Figure 8.17). Mutual funds were 47 percent of IRA assets ($4.3 trillion) at year-end 2017, up from $3.7 trillion at year-end 2016. The other assets category—which includes ETFs, closed-end funds, individual stocks and bonds, and other non–mutual fund securities held through brokerage accounts—had 43 percent of IRA assets, and rose from $3.4 trillion at year-end 2016 to $3.9 trillion at year-end 2017.

Figure 8.17

IRA Assets Surpass $9 Trillion

Trillions of dollars; year-end, selected years

   

1 Other assets includes individual stocks, individual bonds, closed-end funds, ETFs, and other assets held through brokerage or trust accounts.

2 Life insurance company IRA assets are annuities held by IRAs, excluding variable annuity mutual fund IRA assets, which are included in mutual funds.

3 Bank and thrift deposits include Keogh deposits.

e Data 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. See Investment Company Institute, “The US Retirement Market, Fourth Quarter 2017.”

IRA Investors

More than one-third of US households, or nearly 44 million, owned at least one type of IRA as of mid-2017 (Figure 8.18). Traditional IRAs—those introduced under ERISA—were the most common type, owned by 35 million US households. Roth IRAs, created as part of the Taxpayer Relief Act of 1997, were owned by 25 million US households. Nearly eight million US households owned employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, or SIMPLE IRAs).

Figure 8.18

Nearly 44 Million US Households Owned IRAs

 Year created  Number of
US households
with type of IRA
Mid-2017
Percentage of
US households
with type of IRA
Mid-2017
Assets in IRAs
Billions of dollars, year-end 2017
Traditional IRA 1974
(Employee Retirement
Income Security Act)
    35.1 million 27.8% $7,850e
SEP IRA 1978
(Revenue Act)
  7.6 million 6.0% $540e
SAR-SEP IRA 1986
(Tax Reform Act)
 
SIMPLE IRA 1996
(Small Business
Job Protection Act)
 
Roth IRA 1997
(Taxpayer Relief Act)
    24.9 million 19.7% $810e
Any IRA       43.9 million 34.8% $9,200e

e Data are estimated.

Note: Households may own more than one type of IRA. SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs are employer‑sponsored IRAs.

Sources: Investment Company Institute and US Census Bureau. See ICI Research Perspective, “The Role of IRAs in US Households’ Saving for Retirement, 2017” and Investment Company Institute, “The US Retirement Market, Fourth Quarter 2017.”

Investment returns and rollovers from employer-sponsored retirement plans, more than new contributions, have fueled the growth of IRAs. For example, the Internal Revenue Service Statistics of Income Division reports $473 billion was rolled over to IRAs in tax year 2015, compared with $64 billion that was contributed. Although most US households are eligible to make contributions to IRAs, few do so. Indeed, only 12 percent of US households contributed to traditional or Roth IRAs in tax year 2016 and very few eligible households made “catch-up” contributions (the additional contributions individuals aged 50 or older are allowed to make).

Analysis of The IRA Investor Database—which contains information on nearly 17 million IRA investors—finds that rollovers play a particularly important role in opening traditional IRAs. In 2015, most new traditional IRAs (85 percent) were opened only with rollovers (Figure 8.19). In contrast, most new Roth IRAs (71 percent) were opened solely with contributions.

Figure 8.19

New Roth IRAs Often Are Opened with Contributions; New Traditional IRAs Often Are Opened with Rollovers

Percentage of new IRAs opened in 2015 by type of IRA

   

Note: New IRAs are accounts that did not exist in The IRA Investor Database in 2014 and were opened in 2015 by one of the paths indicated. The calculation excludes IRAs that changed financial services firms. The samples are 0.4 million new Roth IRA investors aged 18 or older at year-end 2015 and 1.0 million new traditional IRA investors aged 25 to 74 at year-end 2015.

Source: The IRA Investor Database™. See ICI Research Report, “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007–2015.”

A substantial share of traditional IRA investors has rolled over assets from an employer-sponsored retirement plan. In any given year, only a small portion of traditional IRA investors have a rollover, but, for the most part, the groups that make rollovers differ from year to year. For example, in each year from 2007 through 2015, about one in 10 traditional IRA investors in The IRA Investor Database had a rollover, but more than half of investors with traditional IRAs at year-end 2015 had a rollover at some point during this period.

Traditional IRA–owning households generally researched the decision to roll over money from their former employers’ retirement plans into traditional IRAs. The most common source of information was a professional financial adviser. Advisers were consulted by 60 percent of traditional IRA–owning households with rollovers; about half indicated that they primarily relied on these financial professionals (Figure 8.20). Older households were more likely to consult professional financial advisers than younger households. Six percent of traditional IRA–owning households with rollovers indicated their primary source of information was online materials from financial services firms, with younger households more likely to rely on online resources as their primary source of information than were older households. Twelve percent of households with rollovers primarily relied on information from their employers.

Figure 8.20

Multiple Sources of Information Are Consulted for Rollover Decisions

Percentage of traditional IRA–owning households with rollovers, mid-2017

   

1 Multiple responses are included; 66 percent of traditional IRA–owning households with rollovers consulted multiple sources of information.

2 Other responses given included: myself, other online information, bank, and books and magazines.
Source: Investment Company Institute IRA Owners Survey. See ICI Research Perspective, “The Role of IRAs in US Households’ Saving for Retirement, 2017.”

Households owning IRAs generally are headed by middle-aged individuals (median age of 54 years) with moderate household incomes (median income of $90,000). These households held a median of $62,500 in traditional or Roth IRAs. In addition, many households held multiple types of IRAs. For example, in mid-2017, 50 percent of households with traditional IRAs also owned Roth IRAs, and 15 percent also owned employer-sponsored IRAs.

IRA Portfolios

As with 401(k) participants, younger IRA investors tend to have more invested in equities, equity funds, and target date funds than older investors, according to The IRA Investor Database. Older investors tend to be more invested in non–target date balanced funds and fixed-income investments. In 2015, traditional IRA investors in their thirties had, on average, a combined 72 percent of their assets in equities, equity funds, and target date funds (Figure 8.21). Traditional IRA investors in their sixties held a lower share of their assets (58 percent) in these combined categories, while holding much higher allocations across bond and non–target date balanced funds.

Roth IRA investors display a similar pattern of investing by age, although Roth IRA investors of all ages tended to have higher allocations to equities and equity funds compared with traditional IRA investors.

Figure 8.21

IRA Asset Allocation Varies with Investor Age

Average asset allocation of IRA balances, percentage of assets, year-end 2015

   

1 Other investments includes certificates of deposit and unidentifiable assets.

2 Bond funds include bond mutual funds, bond closed-end funds, and bond ETFs.

3 The Investment Company Institute classifies balanced funds as hybrid in its data.

4 A target date 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.

5 Equity funds include equity mutual funds, equity closed-end funds, and equity ETFs.

Note: Percentages are dollar-weighted averages. Components may not add to 100 percent because of rounding.

Source: The IRA Investor Database™. See ICI Research Report, “The IRA Investor Profile: Traditional IRA Investors’ Activity, 2007–2015” and ICI Research Report, “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007–2015.”

Distributions from IRAs

Withdrawals from IRAs tend to occur later in life, often to fulfill required minimum distributions (RMDs) under the law. The RMD is calculated as a percentage of the IRA balance, based on remaining life expectancy. Traditional IRA owners aged 70½ or older generally must withdraw at least the minimum amount each year, or pay a penalty. In tax year 2016, 71 percent of households that took traditional IRA withdrawals said they calculated the withdrawal amount based on RMD rules.

Individuals appear to respond to distribution rules and penalties. For example, there is a large increase in traditional IRA withdrawal activity as RMD rules kick in (Figure 8.22). This pattern does not occur in Roth IRAs because, unlike traditional IRAs, there are no RMD rules for Roth IRAs (unless the account was inherited). Because early withdrawal penalties can apply to both Roth and traditional IRA investors younger than 59½ years old, however, withdrawal activity is lower among investors younger than 60 compared with investors aged 60 or older.

Figure 8.22

Roth IRA Investors Rarely Take Withdrawals; Traditional IRA Investors Are Heavily Affected by RMDs

Percentage of IRA investors with withdrawals by type of IRA and investor age, 2015

   

Note: The samples are 5.5 million Roth IRA investors aged 25 or older at year-end 2015 and 11.5 million traditional IRA investors aged 25 or older at year-end 2015.

Source: The IRA Investor Database™. See ICI Research Report, “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007–2015.”

Withdrawals from IRAs tend to be retirement related. Of the 26 percent of traditional IRA–owning households that reported taking withdrawals in 2016, 81 percent reported that the head of household, the spouse, or both were retired. Among retired traditional IRA–owning households in mid-2017 that reported taking withdrawals in 2016, 43 percent reported using some or all of the withdrawal amount to pay for living expenses (Figure 8.23). Other uses included reinvesting or saving in another account (39 percent); buying, repairing, or remodeling a home (18 percent); and paying for a healthcare expense (11 percent).

Nonretired traditional IRA–owning households that reported taking withdrawals in 2016 had different uses for the funds. These households were less than half as likely to indicate using some or all of the money for living expenses (21 percent) and were four times as likely to indicate they used the funds for emergencies (22 percent) as retired households (Figure 8.23).

Figure 8.23

Traditional IRA Withdrawals Among Retirees Often Are Used to Pay for Living Expenses

Percentage of withdrawing traditional IRA–owning households by retirement status,1 mid-2017

Purpose of traditional IRA withdrawalRetired1, 2Not retired3
Took withdrawals to pay for living expenses 43 21
Spent it on a car, boat, or big-ticket item other than a home 8 7
Spent it on a healthcare expense 11 8
Used it for an emergency 5 22
Used it for home purchase, repair, or remodeling 18 15
Reinvested or saved it in another account 39 31
Paid for education 1 8
Some other purpose 9 2

1 The household was considered retired if either the head of household or spouse responded affirmatively to the question: “Are you retired from your lifetime occupation?”

2 The base of respondents includes the 21 percent of traditional IRA–owning households that were retired in mid-2017 and took withdrawals in tax year 2016.

3 The base of respondents includes the 5 percent of traditional IRA–owning households that were not retired in mid-2017 and took withdrawals in tax year 2016.

Note: Multiple responses are included.

Source: Investment Company Institute IRA Owners Survey. See ICI Research Perspective, “The Role of IRAs in US Households’ Saving for Retirement, 2017.”

The Role of Mutual Funds in Retirement Savings

Mutual funds play a major role in employer-sponsored DC plans (such as 401(k) plans) and IRAs. At year-end 2017, mutual funds accounted for 59 percent of DC plan assets and 47 percent of IRA assets (Figure 8.24). Investors held slightly more mutual fund assets in DC plans ($4.5 trillion) than in IRAs ($4.3 trillion). Among DC plans, 401(k) plans held the most assets in mutual funds, with $3.5 trillion, followed by 403(b) plans ($494 billion), other private-sector DC plans ($380 billion), and 457 plans ($121 billion) (Figure 8.25). Combined, the $8.8 trillion of mutual fund assets held in DC plans and IRAs at the end of 2017 accounted for 31 percent of the $28.2 trillion US retirement market.

Assets in DC plans and IRAs represent a large share of mutual fund assets overall, and long-term mutual fund assets in particular (Figure 8.24). The $8.8 trillion in mutual fund retirement assets made up 47 percent of all mutual fund assets at year-end 2017. DC plans and IRAs held 53 percent of equity, hybrid, and bond mutual fund assets, but only 13 percent of money market fund assets.

Figure 8.24

Substantial Amounts of Retirement Assets Are Invested in Mutual Funds

Assets, billions of dollars, year-end 2017

   

e Data are estimated.

Sources: Investment Company Institute and Federal Reserve Board. See Investment Company Institute, “The US Retirement Market, Fourth Quarter 2017.”

Types of Mutual Funds Used by Retirement Investors

Retirement investors tend to hold equity investments. At year-end 2017, 58 percent of the $8.8 trillion in mutual fund retirement assets held in DC plans and IRAs were invested in equity funds (Figure 8.25). US domestic equity funds alone constituted about $3.9 trillion, or 44 percent, of mutual fund assets held in DC plans and IRAs; world equity funds were an additional 15 percent.

Retirement investors also gain exposure to equities through hybrid funds, which invest in a mix of equity, bond, and money market securities. At year-end 2017, 24 percent of mutual fund assets held in DC plans and IRAs were held in hybrid funds (Figure 8.25).

Figure 8.25

Majority of Mutual Fund Retirement Account Assets Were Invested in Equities

Billions of dollars, year-end 2017

 EquityHybrid1BondMoney
market
Total
DomesticWorld
IRAs2 $1,802 $607 $939 $704 $240 $4,293
DC plans 2,055 692 1,173 498 123 4,540
401(k) plans 1,550 580 971 363 81 3,545
403(b) plans 301 43 95 37 18 494
457 plans 63 19 25 13 1 121
Other private-sector DC plans3 141 50 82 85 24 380
Total $3,857 $1,299 $2,112 $1,201 $364 $8,833

1 Hybrid funds invest in a mix of equities and fixed-income securities. Most target date and lifestyle funds are counted in this category.

2 IRAs include traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs).

3 Other private-sector DC plans includes private-sector DC plans without 401(k) features.

Note: Components may not add to the total because of rounding.

Source: Investment Company Institute, “The US Retirement Market, Fourth Quarter 2017”

The remaining 18 percent of mutual fund assets held in DC plans and IRAs at the end of 2017 were invested in bond funds and money market funds. Bond funds held $1.2 trillion, or 14 percent, of mutual fund assets held in DC plans or IRAs, and money market funds accounted for $364 billion, or 4 percent (Figure 8.25).

Target Date, Lifestyle, and Index Mutual Funds in Retirement Accounts

Target date and lifestyle mutual funds, generally included in the hybrid fund category, have grown more popular among investors and retirement plan sponsors over the past decade. A target date fund follows a predetermined reallocation of assets over time based on a specified target retirement date. 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 $1.5 trillion at year-end 2017, up from $1.3 trillion at year-end 2016 (Figure 8.26). Target date mutual fund assets were $1.1 trillion, up 26 percent from $887 billion at year-end 2016. Assets in lifestyle mutual funds were $399 billion at year-end 2017, an increase of 7 percent from year-end 2016. At year-end 2017, most (87 percent) target date mutual fund assets were held in retirement accounts, predominantly DC plan accounts. At year-end 2017, although the majority (56 percent) of lifestyle mutual fund assets were held outside of retirement accounts, 25 percent of lifestyle mutual fund assets were held in IRAs and 19 percent were held in DC plans.

Figure 8.26

Target Date and Lifestyle Mutual Fund Assets by Account Type

Billions of dollars; year-end, selected years

   

1 IRAs include traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs).

2 DC plans include 401(k) plans, 403(b) plans, 457 plans, and other DC plans without 401(k) features.

3 A 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.

4 A lifestyle mutual fund maintains a predetermined risk level and generally contains “conservative,” “moderate,” or “aggressive,” in its name.

Note: Components may not add to the total because of rounding.

Source: Investment Company Institute, “The US Retirement Market, Fourth Quarter 2017”

Focusing on the composition of mutual fund assets held in DC accounts reveals that target date mutual funds and index mutual funds have increased their share in DC plan mutual fund assets. Target date mutual funds quintupled their share of DC plan mutual fund assets between year-end 2005 and the end of 2017; they now make up 16 percent of these holdings (Figure 8.27). Over the same period, index mutual funds have doubled their share of DC plan mutual fund assets, rising from 10 percent at year-end 2005 to 21 percent at year-end 2017.

Figure 8.27

Target Date and Index Funds Have Risen as a Share of DC Plans’ Mutual Fund Assets

Percentage of mutual fund assets held in DC plans;1 year-end, selected years

   

1 DC plans include 401(k) plans, 403(b) plans, 457 plans, and other DC plans without 401(k) features.

2 A 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.

3 A lifestyle mutual fund maintains a predetermined risk level and generally contains “conservative,” “moderate,” or “aggressive” in the fund’s name.

4 Index mutual funds are equity, bond, and hybrid funds that target specific market indexes with the general objective of meeting the performance of that index. Equity index funds are the most common type of index fund.

Note: Components may not add to the total because of rounding.

Source: Investment Company Institute, “The US Retirement Market, Fourth Quarter 2017”

The Role of Mutual Funds in Education Savings

Twenty-three percent of households that owned mutual funds in 2017 cited education as a financial goal for their fund investments (Figure 7.8). Nevertheless, the demand for education savings vehicles has been relatively moderate since their introduction in the 1990s, partly because of their limited availability and partly due to investors’ lack of familiarity with them. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA), enacted in 2001, enhanced the attractiveness of two education savings vehicles—Section 529 plans and Coverdell education savings accounts (ESAs)—by making them more flexible and allowing larger contributions. When enacted, the EGTRRA enhancements were temporary. It was not until the 2006 Pension Protection Act (PPA) that the EGTRRA 529 plan enhancements were made permanent. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the EGTRRA enhancements to Coverdell ESAs for two years; the American Taxpayer Relief Act of 2012 made these enhancements permanent.

Assets in 529 Savings Plans

Assets in Section 529 savings plans were $293.9 billion at year-end 2017, up 17 percent since year-end 2016 (Figure 8.28). As of year-end 2017, there were 12.2 million 529 savings plan accounts, with an average account size of approximately $24,100.

Figure 8.28

Section 529 Savings Plan Assets

Billions of dollars; year-end, selected years

   

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. See Investment Company Institute, “529 Plan Program Statistics, December 2017.”

Characteristics of Households Saving for College

In mid-2017, as a group, households saving for college through 529 plans, Coverdell ESAs, or mutual funds held outside these accounts tended to be headed by younger individuals—almost half (48 percent) were younger than 45 (Figure 8.29). Heads of households saving for college had a range of educational attainment. Sixty percent had completed college, 24 percent had an associate’s degree or some college, and 16 percent had a high school diploma or less. These households also represented a range of incomes: 42 percent of households saving for college had household income of less than $100,000, including 24 percent with household income less than $75,000. Finally, about six in 10 of these households had children (younger than 18) in the home, and 42 percent had more than one child in the home.

Figure 8.29

Characteristics of Households Saving for College

Percentage of US households saving for college,1 mid-2017

Age of head of household2
Younger than 35 22
35 to 44 26
45 to 54 27
55 to 64 16
65 or older 9
Education level of head of household2
High school diploma or less 16
Associate’s degree or some college 24
Completed college 26
Some graduate school or completed graduate school 34
Household income3
Less than $25,000 3
$25,000 to $34,999 3
$35,000 to $49,999 5
$50,000 to $74,999 13
$75,000 to $99,999 18
$100,000 or more 58
Number of children in home4
None 38
One 20
Two 26
Three or more 16

1 Households saving for college are households that own education savings plans (Coverdell ESAs or 529 plans) or that said paying for education was one of their financial goals for their mutual funds.

2 Age and education level are based on the sole or co-decisionmaker for saving and investing.

3 Total reported is household income before taxes in 2016.

4 The number of children reported is children younger than 18 living in the home.