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This chapter analyzes the U.S. retirement market; describes the investors who use IRAs, 401(k) plans, 529 plans, and other tax-advantaged savings vehicles; and explores the role of mutual funds in U.S. households’ efforts to save for retirement and education.

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

The U.S. 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. But Americans’ retirement resources 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 and assets (Figure 7.1):

Figure 7.1

Retirement Resource Pyramid

Figure 7.1

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Source: Investment Company Institute, The Success of the U.S. Retirement System

While the importance of each layer differs by household, together they have enabled recent generations of retirees, on average, to maintain their standard of living in retirement.

The construction of each household’s pyramid varies with age and income. Younger households are more likely to save primarily for reasons other than retirement, such as a home purchase, family needs, or education (Figure 7.2). 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. Lower-income households also focus less on saving for retirement, reflecting the fact that Social Security benefits replace a higher share of pre-retirement earnings for workers with lower lifetime earnings.

Figure 7.2

Primary Reason for Household Saving Changes with Age

Percentage of households by age of household head, 2013

Figure 7.2

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Source: Investment Company Institute tabulations of the 2013 Federal Reserve Board Survey of Consumer Finances. See ICI Research Perspective, “Supplemental Tables: Who Gets Retirement Plans and Why, 2013.”

Social Security, the base of the U.S. 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 ($117,000 in 2014). 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. For individuals born in the 1950s, the Congressional Budget Office (CBO) projects that mean first-year Social Security benefits will replace 85 percent of average inflation-indexed lifetime earnings for the bottom 20 percent of retired workers ranked by lifetime household earnings (Figure 7.3). The mean replacement rate drops to 64 percent for the second quintile of households, and then declines more slowly as lifetime household earnings increase. For even the top 20 percent of lifetime earners, Social Security benefits are projected to replace a considerable portion (34 percent) of earnings.

Figure 7.3

Social Security Benefit Formula Is Highly Progressive

2014 CBO estimates of mean first-year benefits relative to average inflation-indexed earnings by lifetime household earnings, 1950s birth cohort, percent

Figure 7.3

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Source: Congressional Budget Office, The 2014 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; more likely to own their homes without mortgage debt; and, if they still have mortgages, more likely to have small mortgages relative to the value of their homes. Retired households typically access 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 2013, about 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 7.4).

Figure 7.4

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

Percentage of near-retiree households1 by income quintile,2 2013

Figure 7.4

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1 Near-retiree households are those with a working head of household aged 55 to 64, excluding the top and bottom 1 percent of the income distribution.
2 Income is household income before taxes in 2012.
3 Retirement assets include DC plan assets (401(k), 403(b), 457, thrift, and other DC plans) and IRAs (traditional, Roth, SEP, SAR-SEP, and SIMPLE), whether from private-sector or government employers.
4 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.
Note: Components may not add to the total because of rounding.
Source: Investment Company Institute tabulations of the 2013 Federal Reserve Board Survey of Consumer Finances

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 U.S. 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 U.S. retirement system, with assets totaling $24.7 trillion at year-end 2014, up from $23.3 trillion at year-end 2013 (Figure 7.5). The largest components of retirement assets were IRAs and employer-sponsored DC plans, holding $7.4 trillion and $6.8 trillion, respectively, at year-end 2014. Other employer-sponsored plans include private-sector DB pension funds ($3.2 trillion), state and local government DB retirement plans ($3.8 trillion), and federal government DB plans ($1.4 trillion). In addition, annuity reserves outside of retirement plans were $2.0 trillion at year-end 2014 (Figure 7.6).

Figure 7.5

U.S. Retirement Assets Rose in 2014

Trillions of dollars; year-end, selected years

Figure 7.5

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1 Other plans include private-sector DB plans; federal, state, and local DB 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.
2 DC plans include 401(k) plans, 403(b) plans, 457 plans, the Federal Employees Retirement System (FERS) Thrift Savings Plan (TSP), Keoghs, and other private-sector DC plans without 401(k) features.
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, Internal Revenue Service Statistics of Income Division, and Government Accountability Office. See Investment Company Institute, “The U.S. Retirement Market, Fourth Quarter 2014.”

Retirement assets include individual account–based savings (e.g., 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, and assets held in those plans represent funding for those promised benefits. Some DB plans do not have sufficient funding to cover promised benefits that households have a legal right to expect; the total unfunded liabilities of DB plans were $3.1 trillion at year-end 2014 (Figure 7.6). Underfunding is more pronounced in the government-sector pension plans. As of year-end 2014, private-sector DB plans had $3.2 trillion in assets and only $0.02 trillion in unfunded liabilities. On the other hand, state and local government DB plans had $3.8 trillion in assets and $1.3 trillion in unfunded liabilities, and federal DB plans had $1.4 trillion in assets and $1.8 trillion in unfunded liabilities.

Figure 7.6

Total U.S. Retirement Assets and Unfunded Pension Liabilities

Trillions of dollars, year-end 2014

Figure 7.6

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e Data are estimated.
Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, Internal Revenue Service Statistics of Income Division, and Government Accountability Office. See Investment Company Institute, “The U.S. Retirement Market, Fourth Quarter 2014.”

Ownership of retirement accumulations is widespread; 63 percent of U.S. households (or 77 million) reported that they had employer-sponsored retirement plans, IRAs, or both in mid-2014 (Figure 7.7). Fifty-seven 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. Thirty-four percent reported having assets in IRAs, and 28 percent had both IRAs and employer-sponsored retirement plans. The households in this snapshot represent a wide range of ages—from younger than 35 to age 65 or older—and so, they are at different points in the life cycle of saving. Focus on retirement savings tends to increase with age and about eight out of 10 near-retiree households have retirement accumulations (Figure 7.4).

Figure 7.7

Many U.S. Households Have Tax-Advantaged Retirement Savings

Percentage of U.S. households, mid-2014

Figure 7.7

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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 U.S. Census Bureau. See ICI Research Perspective, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2014.”

Ownership of IRA and DC plan assets has tended to increase with each successive generation of workers, although recent data suggest that ownership rates may have stabilized. For example, in 1983, when they were 44 to 53 years of age, 44 percent of households born in the 1930s owned IRAs or DC plan accounts (Figure 7.8). By comparison, households born a decade later had a 56 percent ownership rate when they were 44 to 53 years old in 1993; and, among households born in the 1950s, 62 percent had IRAs or DC plan accounts when they were 44 to 53 years old, in 2003. Earlier in their careers, the 1960s birth cohort appeared to be continuing the trend of increased ownership. However, in 2013, when they were 44 to 53 years old, 57 percent of households born in the 1960s owned IRAs or DC plan accounts. Recent experience could indicate that long-term growth in ownership has stabilized, or it could reflect a temporary pause in the long-term trend caused by the weak economy.

Figure 7.8

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, 1983–2013

Figure 7.8

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

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 other types of employer-sponsored retirement plans over the past quarter century, increasing from 26 percent of employer plan assets in 1985 to 45 percent at year-end 2014. At the end of 2014, employer-sponsored DC plans—which include 401(k) plans, 403(b) plans, 457 plans, the federal Thrift Savings Plan (TSP), Keoghs, and other private-sector DC plans—held an estimated $6.8 trillion in assets (Figure 7.9). With $4.6 trillion in assets at year-end 2014, 401(k) plans held the largest share of employer-sponsored DC plan assets. Similar to 401(k) plans, 403(b) plans, which allow employees of educational institutions and certain nonprofit organizations to receive deferred compensation, held another $1.0 trillion in assets. In addition, 457 plans—which allow employees of state and local governments and certain tax-exempt organizations to receive deferred compensation—and the Federal Employees Retirement System (FERS) Thrift Savings Plan (TSP) held a total of $0.7 trillion. Other private-sector DC plans without 401(k) features held the remaining $0.6 trillion.

Figure 7.9

Defined Contribution Plan Assets by Type of Plan

Trillions of dollars; year-end, selected years

Figure 7.9

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* Other private-sector DC plans include Keoghs and other 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 U.S. Retirement Market, Fourth Quarter 2014.”

401(k) Plan Design: Employer Contributions and Investment Lineup

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. If the employer chooses to match employee contributions, the employer can choose a simple match formula, a tiered match formula, or a maximum dollar match formula. According to research conducted by ICI and BrightScope, in 2012, 40 percent of 401(k) plans had a simple match formula (for example, matching 50 percent of employee contributions up to 6 percent of the employee’s salary), 4 percent had a tiered match formula (for example, matching 100 percent of the first 4 percent of salary contributed and 50 percent of the next 2 percent), and 3 percent matched employee contributions up to a maximum amount (for example, matching 50 percent of the first $2,000 of an employee’s contributions) (Figure 7.10).

Figure 7.10

Design of 401(k) Employer Contributions

Percentage of plans among plans with audited 401(k) filings in the BrightScope database, 2012

Figure 7.10

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1 Simple match formulas are employer contributions of a specified percentage of employee contributions up to a fixed percentage of employee salary.
2 Tiered match formulas match employee contributions at different rates for different levels of employee contributions.
3 Maximum dollar match formulas are employer contributions of some percentage of employee contributions up to a fixed dollar amount.
4 Other employer contributions include nonelective contributions and lump-sum contributions without an additional matching formula. Plans with employer matches but missing descriptions of the employer match data may be included in this category.
Note: The sample is 35,472 plans with $2.9 trillion in assets. Audited DC/401(k) filings generally include plans with 100 or more participants. Plans with fewer than four investment options or more than 100 investment options are excluded from this analysis. Components do not add to 100 percent because of rounding.
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.

Employers use a variety of simple match formulas in their 401(k) plans, choosing a combination of the percentage of employee contributions to match (the match rate), as well as the maximum contribution percentage to match (the match level). Among 401(k) plans using simple match formulas, the most common combination was matching 50 cents on the dollar up to 6 percent of pay, used by 17 percent of plans with simple matches (Figure 7.11). The second most common match formula was matching dollar for dollar up to 6 percent of pay, used by 15 percent of plans with simple matches. Matching up to 6 percent of pay was the most common match level (used by 41 percent of 401(k) plans with simple matches), and the most common match rate was 100 percent, or dollar for dollar, used in 46 percent of plans with simple matches.

Figure 7.11

Employers with Simple Matches Use a Variety of Formulas

Percentage of plans with simple match formulas from audited 401(k) filings in the BrightScope database, 2012

Figure 7.11

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Note: Plans with no employer contribution, maximum dollar contributions, tiered match formulas, or only a nonmatching contribution were excluded. The sample is the 40 percent of plans with simple match formulas. Audited DC/401(k) filings generally include plans with 100 or more participants. Plans with fewer than four investment options or more than 100 investment options are excluded from this analysis. Components may not add to the totals and do not add to 100 percent overall because minor categories have been omitted.
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.

Investment Lineup

In addition to choosing how contributions to the 401(k) plan will be structured, employers also select the number and types of investment options in the plan. In 2012, domestic equity funds, international equity funds, and domestic bond funds were widely available, offered in 99 percent, 98 percent, and 98 percent of plans, respectively (Figure 7.12). A little more than half of 401(k) plans offered money funds on average and almost two-thirds of 401(k) plans offered guaranteed investment contracts (GICs).

Figure 7.12

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

Percentage of 401(k) plans offering specified investment option, 2012

Figure 7.12

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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 Other includes commodity funds, real estate funds, and individual stocks (including company stock) and bonds.
Note: The sample is 35,472 plans with $2.9 trillion in assets. Audited DC/401(k) filings generally include plans with 100 or more participants. Funds include mutual funds, collective investment trusts, separate accounts, and other pooled investment products. Plans with fewer than four investment options or more than 100 investment options are excluded from 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.

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

Asset Allocation

For many American workers, 401(k) plan accounts have become an important part of 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 more of their portfolios 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 2013, individuals in their twenties had 37 percent of their 401(k) assets in equity funds and company stock; 47 percent in target date funds and non–target date balanced funds; and only 9 percent in GICs, stable value funds, money funds, and bond funds (Figure 7.13). All told, participants in their twenties had 76 percent of their 401(k) assets in equities. By comparison, at year-end 2013, participants in their sixties had 55 percent of their 401(k) assets in equities. At year-end 2013, individuals in their sixties had 30 percent of their 401(k) account assets in GICs, stable value funds, money funds, and bond funds; only 20 percent in target date funds and non–target date balanced funds; and 44 percent in equity funds and company stock.

Figure 7.13

401(k) Asset Allocation Varied with Participant Age

Average asset allocation of 401(k) account balances, percentage of account balances, year-end 2013

Figure 7.13

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* 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.
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. Components do not add to 100 percent because of rounding.
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 2013.”

Portfolio allocation also varies widely within age groups. At year-end 2013, 65 percent of 401(k) participants in their twenties held more than 80 percent of their account in equities, and 11 percent of these participants held 20 percent or less (Figure 7.14). Of 401(k) participants in their sixties, 22 percent held more than 80 percent of their account in equities, and two out of 10 held 20 percent or less.

Figure 7.14

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

Asset allocation distribution of 401(k) participant account balance to equities, percentage of participants, year-end 2013

Figure 7.14

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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. Components do not add to 100 percent because of rounding.
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 2013.”

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. Since 2006, the share of 401(k) plans that offer target date funds, the share of 401(k) plan participants offered target date funds, and the share of 401(k) participants holding target date funds all have increased (Figure 7.15). At year-end 2013, target date funds accounted for 15 percent of 401(k) assets, up from 5 percent at year-end 2006.

In 2013, 71 percent of 401(k) plans offered target date funds, and 66 percent of 401(k) plan participants were offered target date funds (Figure 7.15). Because not all plan participants choose to allocate assets to these 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 2013, 41 percent of 401(k) participants held at least some plan assets in target date funds. In addition, because not all participants with assets in target date funds allocated 100 percent of their holdings to these funds, and because participants with assets in these 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 these funds.

Figure 7.15

Target Date Funds’ 401(k) Market Share

Percentage of total 401(k) market; year-end, 2006 and 2013

Figure 7.15

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Note: Funds include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product.
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 2013.”

Account Balances

Account balances tended to be higher the longer 401(k) plan participants had 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) account balance of $248,397 at year-end 2013 (Figure 7.16). Participants in their forties with five to 10 years of tenure at their current employer had an average 401(k) balance of $62,087. The median 401(k) plan participant was 46 years old at year-end 2013, and the median job tenure was eight years.

Figure 7.16

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

Average 401(k) account balance by participant age and tenure, 2013

Figure 7.16

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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 2013.”

Plan Loans

Most 401(k) participants do not borrow from their plans, although the majority have access to loans. At year-end 2013, 21 percent of participants eligible for loans had loans outstanding, the same rate as over the previous four years. However, not all participants 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 18 percent had loans outstanding at year-end 2013. The average unpaid loan balances among participants with loans represented about 12 percent of their 401(k) account balances (net of the unpaid loan balances). In aggregate, U.S. Department of Labor data indicate that outstanding loan amounts were less than 2 percent of 401(k) plan assets in 2012.

Individual Retirement Accounts

Traditional IRAs, the first type of IRA, were created in 1974 under the Employee Retirement Income Security Act (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 employers to provide retirement plans by simplifying the rules applicable to tax-qualified plans.

Total IRA assets, $7.4 trillion at year-end 2014, accounted for 30 percent of U.S. retirement assets. Mutual funds accounted for $3.5 trillion of IRA assets at year-end 2014, up from $3.3 trillion at year-end 2013 (Figure 7.17). Assets managed by mutual funds were the largest component of IRA assets, followed by other assets, which include ETFs, individual stocks and bonds, and other securities held through brokerage accounts ($3.0 trillion at year-end 2014). The mutual fund industry’s share of the IRA market was 48 percent at year-end 2014, the same as at year-end 2013.

Figure 7.17

IRA Assets

Trillions of dollars; year-end, selected years

Figure 7.17

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1 Other assets include 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, Internal Revenue Service Statistics of Income Division, and Government Accountability Office. See Investment Company Institute, “The U.S. Retirement Market, Fourth Quarter 2014.”

IRA Investors

More than three out of 10 U.S. households, or nearly 42 million, owned at least one type of IRA as of mid-2014 (Figure 7.18). Traditional IRAs—those introduced under ERISA—were the most common type, owned by 31 million U.S. households. Roth IRAs, first available in 1998 under the Taxpayer Relief Act of 1997, were owned by 19 million U.S. households. Seven million U.S. households owned employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, or SIMPLE IRAs).

Although most U.S. households are eligible to make contributions to IRAs, few do so. Indeed, only 12 percent of U.S. households contributed to any type of IRA in tax year 2013. In addition, very few eligible households made “catch-up” contributions to traditional or Roth IRAs.

Figure 7.18

Nearly 42 Million U.S. Households Owned IRAs
 

  Year created Number of U.S. households with type of IRA Percentage of U.S. households with type of IRA (mid-2014) Assets in IRAs (billions of dollars, year-end 2014)
Traditional IRA 1974
(Employee Retirement Income Security Act)
31.1 million 25.3% $6,421e
SEP IRA 1978
(Revenue Act)
7.4 million 6.0% $472e
SAR-SEP IRA 1986
(Tax Reform Act)
SIMPLE IRA 1996
(Small Business Job Protection Act)
Roth IRA 1997
(Taxpayer Relief Act)
19.2 million 15.6% $550e
Any IRA 41.5 million 33.7% $7,443e

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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 U.S. Census Bureau. See ICI Research Perspective, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2014” and “The U.S. Retirement Market, Fourth Quarter 2014.”

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 make rollovers, but analysis of The IRA Investor Database—which contains information on more than 15 million IRA investors—finds that, for the most part, the groups that make rollovers differ from year to year. Rollovers play an important role in opening traditional IRAs. With the availability of retirement accumulations that can be rolled over, whether from DC accounts or as lump-sum distributions from DB plans, most (87 percent) new traditional IRAs in 2012 were opened only with rollovers (Figure 7.19). By contrast, in 2012, 11 percent of Roth IRAs were opened only with rollovers; instead, the majority (71 percent) of Roth IRAs were opened only with contributions.

Figure 7.19

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

Percentage of new IRAs opened in 2012 by type of IRA

Figure 7.19

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Note: New IRAs are accounts that did not exist in The IRA Investor Database in 2011 and were opened by one of the paths indicated in 2012. The calculation excludes IRAs that changed financial services firms. The samples are 0.2 million new Roth IRA investors aged 18 or older at year-end 2012 and 0.7 million new traditional IRA investors aged 25 to 74 at year-end 2012. Components may not add to 100 percent because of rounding.
Source: The IRA Investor Database™. See ICI Research Report, “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007–2012.”

Traditional IRA–owning households generally researched the decision to roll over money from their former employer’s retirement plan into a traditional IRA. The most common source of information was professional financial advisers. Advisers were consulted by 61 percent of traditional IRA–owning households with rollovers, with half indicating they primarily relied on financial professionals (Figure 7.20). Older households were more likely to consult professional financial advisers than younger households. Ten 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 than older households.

Households owning IRAs generally are headed by middle-aged individuals (median age of 52 years) with moderate household incomes (median income of $80,500). These households held a median of $50,000 in IRAs. In addition, many households held multiple types of IRAs. For example, 36 percent of households with traditional IRAs also owned Roth IRAs, and 13 percent also owned employer-sponsored IRAs.

Figure 7.20

Multiple Sources of Information Are Consulted for the Rollover Decision

Percentage of traditional IRA–owning households with rollovers, mid-2014

Figure 7.20

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1 Multiple responses are included.
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 U.S. Households’ Saving for Retirement, 2014.”

IRA Portfolios

At year-end 2012, younger IRA investors tended to have more invested in equities, equity funds, and target date funds, on average, than older investors, according to The IRA Investor Database. Older investors were invested more heavily in non–target date balanced funds and fixed-income investments. For example, traditional IRA investors in their thirties had, on average, 50 percent of their assets in equities and equity funds and another 17 percent in target date funds (Figure 7.21). Traditional IRA investors in their sixties held 46 percent and 5 percent of their traditional IRA assets, respectively, in these two asset categories. By contrast, traditional IRA investors in their sixties had nearly half of their assets in money market funds (13 percent), bonds and bond funds (23 percent), and non–target date balanced funds (11 percent). Traditional IRA investors in their thirties held about 29 percent of their assets in these three asset categories.

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. Roth IRA investors in their thirties had, on average, 62 percent of their assets in equities and equity funds and another 16 percent in target date funds, while Roth IRA investors in their sixties held 59 percent and 4 percent of their Roth IRA assets, respectively, in these two asset categories (Figure 7.21). By contrast, Roth IRA investors in their sixties had more than a third of their assets in money market funds (10 percent), bonds and bond funds (13 percent), and non–target date balanced funds (13 percent). Roth IRA investors in their thirties held about 21 percent of their assets in these three asset categories.

Figure 7.21

IRA Asset Allocation Varied with Investor Age

Average asset allocation of IRA balances, percentage of assets, year-end 2012

Figure 7.21

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1 Other investments include certificates of deposit and unidentifiable assets.
2 Bond funds include bond mutual funds, bond closed-end funds, and bond ETFs.
3 Balanced funds invest in a mix of equities and fixed-income securities.
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, 2007–2012,” and ICI Research Report, “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007–2012.”

Distributions from IRAs

Withdrawals from IRAs tend to occur later in life, often to fulfill required minimum distributions (RMDs). An RMD is equal to 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 2013, 65 percent of individuals who took traditional IRA withdrawals stated they calculated the withdrawal amount based on RMD rules.

In contrast to traditional IRAs, Roth IRAs have no RMDs (unless they are inherited Roth IRAs). As a result, withdrawal activity is much lower among Roth IRA investors. In 2012, only 4 percent of Roth IRA investors aged 25 or older made withdrawals, compared with 22 percent of traditional IRA investors (Figure 7.22). Early withdrawal penalties can apply to both Roth and traditional IRA investors younger than 59½, and withdrawal activity is lower among investors younger than 60 compared with investors aged 60 or older.

Figure 7.22

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, 2012

Figure 7.22

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Note: The samples are 4.9 million Roth IRA investors aged 25 or older at year-end 2012 and 10.4 million traditional IRA investors aged 25 or older at year-end 2012.
Source: The IRA Investor Database™. See ICI Research Report, “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007–2012.”

Withdrawals from IRAs tend to be retirement related. Of the 20 percent of traditional IRA–owning households who reported taking withdrawals in tax year 2013, 75 percent reported that the head of household, the spouse, or both were retired. Of retired households that took traditional IRA withdrawals in tax year 2013, 41 percent reported using some or all of the withdrawal amount to pay for living expenses (Figure 7.23). Other uses included reinvesting or saving in another account (38 percent), paying for a healthcare expense (22 percent), and buying, repairing, or remodeling a home (22 percent).

Traditional IRA–owning households that reported taking withdrawals in tax year 2013 and were not retired indicated a slightly different pattern for the withdrawals. The nonretired households with withdrawals were less likely to indicate using some or all of the money for living expenses (36 percent) or a healthcare expense (17 percent) than the retired households (Figure 7.23). Nonretired households were more likely than retired households to indicate that they needed to use some or all of the withdrawal for an emergency (20 percent) or for home purchase, repair, or remodeling (28 percent).

Figure 7.23

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

Percentage of traditional IRA–owning households with withdrawals by retirement status,1 mid-2014

Purpose of traditional IRA withdrawal Retired1, 2 Not retired3
Took withdrawals to pay for living expenses 41 36
Spent it on a car, boat, or big-ticket item other than a home 9 8
Spent it on a healthcare expense 22 17
Used it for an emergency 12 20
Used it for home purchase, repair, or remodeling 22 28
Reinvested or saved it in another account 38 28
Paid for education 6 7
Some other purpose 13 10

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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 15 percent of traditional IRA–owning households that were retired in mid-2014 and took withdrawals in tax year 2013.
3 The base of respondents includes the 5 percent of traditional IRA–owning households that were not retired in mid-2014 and took withdrawals in tax year 2013.
Note: Multiple responses are included.
Source: ICI IRA Owners Survey. See ICI Research Perspective, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2014.”

Because current withdrawal activity might 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 2014 that did not take a withdrawal in tax year 2013, 69 percent said that they were not likely to take a withdrawal before age 70½. Traditional IRA–owning households that were either (1) retired and did not take withdrawals in tax year 2013 or (2) not retired reported a pattern for the expected role of their future IRA withdrawals in retirement that is consistent with those that withdrew in tax year 2013. Sixty percent of these households reported they plan to use IRA withdrawals to pay for living expenses in retirement, and 42 percent reported they plan to reinvest or save their IRA withdrawals in another account.

The Role of Mutual Funds in Retirement Savings

At year-end 2014, mutual funds held in DC plans and IRAs accounted for $7.3 trillion, or 29 percent, of the $24.7 trillion U.S. retirement market. The $7.3 trillion in mutual fund retirement assets made up 46 percent of all mutual fund assets at year-end 2014. Mutual funds accounted for 55 percent of DC plan assets and 48 percent of IRA assets (Figure 7.24). Additionally, retirement investors tend to hold long-term mutual funds. At year-end 2014, DC plans and IRAs held 53 percent of equity, balanced, and bond mutual funds, but only 13 percent of money market funds.

Figure 7.24

Substantial Amount of Retirement Assets Are Invested in Mutual Funds

Assets, billions of dollars, year-end 2014

Figure 7.23

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e Data are estimated.
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 U.S. Retirement Market, Fourth Quarter 2014.”

Across the entire U.S. retirement market, mutual funds play a major role in IRAs and employer-sponsored DC plans, such as 401(k) plans. At year-end 2014, investors held slightly more mutual fund assets in DC plans ($3.7 trillion, or 55 percent of total DC plan assets) than in IRAs ($3.5 trillion, or 48 percent of total IRA assets) (Figure 7.25). Among DC plans, 401(k) plans held the most assets in mutual funds, with $2.9 trillion, followed by 403(b) plans ($456 billion), other private-sector DC plans ($287 billion), and 457 plans ($112 billion).

Types of Mutual Funds Used by Retirement Plan Investors

Retirement investors tend to hold equity investments. At year-end 2014, 58 percent of the $7.3 trillion in mutual fund retirement assets held in DC plans and IRAs were invested in domestic or world equity funds (Figure 7.25). By comparison, about 52 percent of overall fund industry assets—retirement and nonretirement accounts—were invested in domestic or world equity funds. Domestic equity funds alone constituted about $3.2 trillion, or 45 percent, of mutual fund assets held in DC plans and IRAs.

Retirement investors also gain exposure to equities and fixed-income securities through balanced funds. At year-end 2014, 23 percent of mutual fund assets held in DC plans and IRAs were held in balanced funds, which invest in a mix of equity, bond, and money market securities (Figure 7.25). At year-end 2014, the remaining 19 percent of mutual fund assets held in DC plans and IRAs were invested in bond funds and money market funds. Bond funds held $1.0 trillion, or 14 percent, of mutual fund assets held in DC plans and IRAs, and money market funds accounted for $364 billion, or 5 percent.

Figure 7.25

Majority of Mutual Fund Retirement Account Assets Were Invested in Equities

Billions of dollars, year-end 2014

  Equity  
  Domestic World Balanced1 Bond Money market Total
IRAs2 $1,484 $465 $783 $593 $221 $3,546
DC plans 1,763 500 873 444 143 3,723
401(k) plans 1,312 406 730 321 99 2,868
403(b) plans 284 37 79 37 20 456
457 plans 62 16 19 14 2 112
Other private-sector DC plans3 105 41 46 72 23 287
Total 3,248 965 1,656 1,037 364 7,269

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1 Balanced 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 include Keoghs and other private-sector DC plans without 401(k) features.
Note: Components may not add to the total because of rounding.
Source: Investment Company Institute, “The U.S. Retirement Market, Fourth Quarter 2014”

Target Date and Lifestyle Mutual Funds

Target date and lifestyle mutual funds, generally included in the balanced 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 $1.1 trillion at year-end 2014, up from $977 billion at year-end 2013 (Figure 7.26). Target date mutual funds’ assets were up 14 percent in 2014, increasing from $618 billion to $703 billion. Assets in lifestyle mutual funds grew 10 percent in 2014, rising from $359 billion to $394 billion. The bulk (89 percent) of target date mutual fund assets was held in retirement accounts, compared with 43 percent of lifestyle mutual fund assets.

Figure 7.26

Target Date and Lifestyle Mutual Fund Assets by Account Type

Billions of dollars; year-end, 2004–2014

Figure 7.26

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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, Keoghs, 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 the fund’s name.
Note: Components may not add to the total because of rounding.
Source: Investment Company Institute, “The U.S. Retirement Market, Fourth Quarter 2014”

The Role of Mutual Funds in Education Savings

Twenty-three percent of households that owned mutual funds in 2014 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 Economic Growth and Tax Relief Reconciliation Act (EGTRRA), enacted in 2001, enhanced the attractiveness of Section 529 plans and Coverdell Education Savings Accounts (ESAs)—two education savings vehicles—by allowing greater contributions to them and making them more flexible. The Pension Protection Act (PPA), enacted in 2006, made the EGTRRA enhancements to Section 529 plans 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 Section 529 savings plans increased 9.6 percent in 2014, with $224.7 billion at year-end 2014, up from $205.1 billion at year-end 2013 (Figure 7.27). As of year-end 2014, there were 11.0 million 529 savings plan accounts, with an average account size of approximately $20,500.

Figure 7.27

Section 529 Savings Plan Assets

Billions of dollars; year-end, selected years

Figure 7.27

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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. See Investment Company Institute, “529 Plan Program Statistics, December 2014.”

In mid-2014, 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, with half younger than 45 (Figure 7.28). Heads of households saving for college had a range of education attainment: 47 percent had less than four years of college and 53 percent had four years or more. These households also had a range of incomes: 39 percent earned less than $75,000; 16 percent earned between $75,000 and $99,999; and 45 percent earned $100,000 or more. About two-thirds of these households had children (younger than 18) in the home, and 39 percent had more than one child in the home.

Figure 7.28

Characteristics of Households Saving for College

Percentage of U.S. households saving for college,1 mid-2014

  Domestic
Age of head of household2
Younger than 35 23
35 to 44 27
45 to 54 28
55 to 64 13
65 or older 9
   
Education level
High school diploma or less 20
Associate’s degree or some college 27
Completed college 22
Some graduate school or completed graduate school 31
   
Household income3
Less than $25,000 5
$25,000 to $34,999 4
$35,000 to $49,999 11
$50,000 to $74,999 19
$75,000 to $99,999 16
$100,000 or more 45
   
Number of children in home4
None 35
One 26
Two 25
Three or more 14

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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 is based on the sole or co-decisionmaker for saving and investing.
3 Total reported is household income before taxes in 2013.
4 The number of children reported is children younger than 18 living in the home.