back to top

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 this picture of Americans’ retirement resources is inaccurate—a five-layer pyramid paints a clearer one.

Retirement Resource Pyramid

The retirement resource pyramid has five layers, which draw from government programs, compensation deferred until retirement, and other savings: (1) Social Security; (2) homeownership; (3) employer-sponsored retirement plans (private-sector and government employer plans, including both defined benefit [DB] and defined contribution [DC] plans); (4) individual retirement accounts (IRAs), including rollovers; and (5) other assets (Figure 7.1). 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.

Figure 7.1

Retirement Resource Pyramid

Figure 7.1

Download an Excel file of this data.

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

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 ($113,700 in 2013). 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 1940s, the Congressional Budget Office (CBO) projects that median first-year Social Security benefits will replace 77 percent of average lifetime earnings for the bottom 20 percent of retired workers ranked by lifetime household earnings (Figure 7.2). The median replacement rate drops to 51 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 (32 percent) of earnings.

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.

Figure 7.2

Social Security Benefit Formula Is Highly Progressive

2013 CBO estimates of median first-year benefits relative to average indexed earnings by lifetime household earnings, 1940s birth cohort, percent

Figure 7.2

Download an Excel file of this data.

Source: Congressional Budget Office (The 2013 Long-Term Projections for Social Security: Additional Information)

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 2010, about 80 percent of 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 7.3).

Although less important on average, retirees also rely on other assets in retirement. These assets can be financial—including bank deposits and 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 like household appliances and furniture). Higher-income households are more likely to have large holdings of assets in this category.

Figure 7.3

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

Percentage of near-retiree households1 by income group,2 2010

Figure 7.3

Download an Excel file of this data.

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 Total is household income before taxes in 2009.
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 DB plan benefits include households currently receiving DB plan benefits and households with the promise of future DB plan benefits, whether from private-sector or government employers.
Note: Components may not add to the total because of rounding.
Source: Investment Company Institute tabulations of the Federal Reserve Board Survey of Consumer Finances. See The Success of the U.S. Retirement System.

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 $23.0 trillion at year-end 2013, up from year-end 2012 (Figure 7.4). The largest components of retirement assets were IRAs and employer-sponsored DC plans, holding $6.5 trillion and $5.9 trillion, respectively, at year-end 2013. Other employer-sponsored plans include private-sector DB pension funds ($3.0 trillion), state and local government employee retirement plans ($3.9 trillion), and federal government plans—which include both federal employees’ DB plans and the Thrift Savings Plan ($1.8 trillion). In addition, annuity reserves outside of retirement plans were $2.0 trillion at year-end 2013.

Figure 7.4

U.S. Retirement Assets Rose in 2013

Trillions of dollars; year-end, selected years

Figure 7.4

Download an Excel file of this data.

1 Other plans include private-sector DB plans; federal, state, and local pension plans; and all fixed and variable annuity reserves at life insurance companies less annuities held by IRAs, 403(b) plans, 457 plans, and private pension funds. Federal pension plans include U.S. Treasury security holdings of the civil service retirement and disability fund, the military retirement fund, the judicial retirement funds, the Railroad Retirement Board, and the foreign service retirement and disability fund. These plans also include securities held in the National Railroad Retirement Investment Trust and Federal Employees Retirement System (FERS) Thrift Savings Plan (TSP).
2 DC plans include 401(k) plans, 403(b) plans, 457 plans, Keoghs, and other 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, and Internal Revenue Service Statistics of Income Division. See “The U.S. Retirement Market, Fourth Quarter 2013.”

Sixty-seven percent of U.S. households (or 82 million) reported that they had employer-sponsored retirement plans, IRAs, or both in May 2013 (Figure 7.5). More than six in 10 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. Nearly four out of 10 households reported having assets in IRAs, and 32 percent had both IRAs and employer-sponsored retirement plans.

Figure 7.5

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

Percentage of U.S. households, May 2013

Figure 7.5

Download an Excel file of this data.

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, 2013.”

Ownership of IRA and DC plan assets has tended to increase with each successive generation of workers, although recent data suggest that ownership rates have stabilized. For example, in 1983, when they were
44 to 53 years of age, 32 percent of households born in the 1930s owned IRAs or DC plan accounts (Figure 7.6). By comparison, households born a decade later had a 60 percent ownership rate when they were 44 to 53 years old in 1993; and, among households born in the 1950s, 73 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, 71 percent of households born in the 1960s owned IRAs or DC plan accounts, almost the same as the 1950s birth cohort a decade earlier. Recent experience could indicate that long-term growth in ownership has stabilized, or it could just reflect a temporary pause in the long-term trend caused by the weak economy.

Figure 7.6

Younger Households Tend to Have Higher 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 7.6

Download an Excel file of this data.

Note: Age is the average age of the 10-year birth cohort at the time of the survey. The 10-year birth cohorts are defined using the age of the head of household. Data from 2000 to 2013 are from annual household surveys conducted by ICI. Growth for the period 1983 to 2000 is estimated using the Federal Reserve Board Survey of Consumer Finances.
Sources: ICI Annual Mutual Fund Shareholder Tracking Surveys and ICI tabulations of 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 40 percent at year-end 2013. At the end of 2013, employer-sponsored DC plans—which include 401(k) plans, 403(b) plans, 457 plans, Keoghs, and other DC plans—held an estimated $5.9 trillion in assets (Figure 7.7). With $4.2 trillion in assets at year-end 2013, 401(k) plans held the largest share of employer-sponsored DC plan assets. Two types of plans similar to 401(k) plans—403(b) plans, which allow employees of education institutions and certain nonprofit organizations to receive deferred compensation, and 457 plans, which allow employees of state and local governments and certain tax-exempt organizations to receive deferred compensation—held another $1.1 trillion in assets. DC plans without 401(k) features held the remaining $525 billion.

Figure 7.7

Defined Contribution Plan Assets by Type of Plan

Billions of dollars; year-end, selected years

Figure 7.7

Download an Excel file of this data.

* Other DC plans include Keoghs and other DC plans (profit-sharing, thrift-savings, stock bonus, and money purchase) without 401(k) features.
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

401(k) Participants: Asset Allocation, 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 2012, individuals in their twenties had 36 percent of their 401(k) assets in equity funds and company stock; 46 percent in target date funds and non–target date balanced funds; and only 11 percent in guaranteed investment contracts (GICs), stable value funds, money funds, and bond funds (Figure 7.8). All told, participants in their twenties had 73 percent of their 401(k) assets in equities. By comparison, at year-end 2012, participants in their sixties had 48 percent of their 401(k) assets in equities. At year-end 2012, individuals in their sixties had 36 percent of their 401(k) account assets in GICs, stable value funds, money funds, and bond funds; only 19 percent in target date funds and non–target date balanced funds; and 39 percent in equity funds and company stock.

Figure 7.8

401(k) Asset Allocation Varied with Participant Age

Average asset allocation of 401(k) account balances, percentage of assets, year-end 2012

Figure 7.8

Download an Excel file of this data.

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 2012.”

Portfolio allocation also varies widely within age groups. At year-end 2012, 64 percent of 401(k) participants in their twenties held more than 80 percent of their account in equities, and 10 percent of these participants held 20 percent or less (Figure 7.9). Of 401(k) participants in their sixties, 20 percent held more than 80 percent of their account in equities, and 23 percent held 20 percent or less.

Figure 7.9

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 2012

Figure 7.9

Download an Excel file of this data.

Note: Equities include equity funds, company stock, and the equity portion of balanced funds. Funds include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product invested primarily in the security indicated.
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 2012.”

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 have all increased (Figure 7.10). At year-end 2012, target date funds accounted for 15 percent of 401(k) assets, up from 5 percent at year-end 2006.

Figure 7.10

Target Date Funds’ 401(k) Market Share

Percentage of total 401(k) market; year-end, 2006 and 2012

Figure 7.10

Download an Excel file of this data.

Note: Funds include mutual funds, bank collective trusts, life insurance separate accounts, and 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 2012.”

In 2012, 72 percent of 401(k) plans offered target date funds, and 68 percent of 401(k) plan participants were offered target date funds (Figure 7.10). 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 2012, 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.

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 $224,287 at year-end 2012 (Figure 7.11). Participants in their forties with five to 10 years of tenure at their current employer had an average 401(k) balance of $53,060. The median 401(k) plan participant was 45 years old at year-end 2012, and the median job tenure was eight years.

FIGURE 7.11

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

Average 401(k) participant account balance, year-end 2012

Figure 7.11

Download an Excel file of this 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 2012.”

Loan Activity

Most 401(k) participants do not borrow from their plans, though in recent years loan activity has edged up. At year-end 2012, 21 percent of participants eligible for loans had loans outstanding. 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 2012. The average unpaid loan balances among participants with loans represented about 13 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 2011.

Services and Expenses in 401(k) Plans

Employers are confronted with two competing economic pressures: the need to attract and retain quality workers with competitive compensation packages and the need to keep their products and services competitively priced. In deciding whether to offer 401(k) plans to their workers, employers must decide if the benefits of offering a plan (in attracting and retaining quality workers) outweigh the costs of providing the plan and plan services—both the compensation paid to the worker and any other costs associated with maintaining the plan and each individual plan participant account.

To provide and maintain 401(k) plans, employers are required to obtain a variety of administrative, participant-focused, regulatory, and compliance services. Employers offering 401(k) plans typically hire service providers to operate these plans, and these providers charge fees for their services.

As with any employee benefit, the employer generally determines how the costs will be shared between the employer and employee. Fees can be paid directly by the plan sponsor (the employer), directly by the plan participant (the employee), indirectly by the participant through fees or other reductions in returns paid to the investment provider, or by some combination of these methods (Figure 7.12).

Figure 7.12

A Variety of Arrangements May Be Used to Compensate 401(k) Service Providers

Figure 7.12

Download an Excel file of this data.

Note: In selecting the service provider(s) and deciding the cost-sharing for the 401(k) plan, the employer/plan sponsor will determine which combinations of these fee arrangements will be used in the plan.
Source: ICI Research Perspective, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2012”

One key driver of 401(k) plan fees is plan size. A Deloitte/ICI study of 525 DC plans in 2011 created and analyzed a comprehensive plan fee measure, the “all-in fee.” The study found that plans with more participants and larger average account balances tended to have lower all-in fees than plans with fewer participants and smaller average account balances. This observed effect likely results in part from fixed costs required to start up and run the plan, much of which is driven by legal and regulatory requirements. It appears that economies of scale are gained as a plan grows because these fixed costs can be spread across more participants, a larger asset base, or both. In addition, plans with higher participant contribution rates or automatic enrollment tended to have lower all-in fees. Plans with a higher percentage of their assets in equity investments tended to have higher all-in fees, reflecting the higher expense ratios associated with equity investing compared with fixed-income investing. Plans with a higher number of investment options also tended to have higher all-in fees. The study also examined types of service providers and variables relating to plans’ relationships with their service providers—but found little impact on fees.

Participants in 401(k) plans holding mutual funds tend to invest in lower-cost funds and funds with below-average portfolio turnover. Both characteristics help to keep down the costs of investing in mutual funds through 401(k) plans. For example, at year-end 2012, 35 percent of 401(k) equity mutual fund assets were in funds that had total annual expense ratios of less than 0.50 percent of fund assets, and another 49 percent had expense ratios between 0.50 percent and 1.00 percent (Figure 7.13). On an asset-weighted basis, the average total expense ratio incurred on 401(k) participants’ holdings of equity mutual funds through their 401(k) plans was 0.63 percent in 2012, less than the asset-weighted average total expense ratio of 0.77 percent for equity mutual funds industrywide. Similarly, equity mutual funds held in 401(k) accounts tend to have lower turnover in their portfolios. The asset-weighted average turnover rate of equity funds held in 401(k) accounts was 36 percent in 2012, less than the industrywide asset-weighted average of 48 percent. More than 60 percent of 401(k) assets at year-end 2013 were invested in mutual funds.

Figure 7.13

401(k) Equity Mutual Fund Assets Are Concentrated in Lower-Cost Funds

Percentage of 401(k) equity mutual fund assets, year-end 2012

Figure 7.13

Download an Excel file of this data.

* The total expense ratio, which is reported as a percentage of fund assets, includes fund operating expenses and 12b-1 fees.
Note: The figure excludes mutual funds available as investment choices in variable annuities. Components do not add to 100 percent because of rounding.
Sources: Investment Company Institute and Lipper. See ICI Research Perspective, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 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. Policymakers have since changed the rules governing traditional IRAs and added more types of IRAs—employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs) and after-tax IRAs (Roth IRAs).

Total IRA assets, $6.5 trillion at year-end 2013, accounted for 28 percent of U.S. retirement assets. Mutual funds accounted for $3.0 trillion of IRA assets at year-end 2013, up from $2.5 trillion at year-end 2012 (Figure 7.14). 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 ($2.6 trillion at year-end 2013). The mutual fund industry’s share of the IRA market was 45 percent at year-end 2013, compared with 44 percent at year-end 2012.

FIGURE 7.14

IRA Assets

Billions of dollars; year-end, selected years

Figure 7.14

Download an Excel file of this data.

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, and Internal Revenue Service Statistics of Income Division. See “The U.S. Retirement Market, Fourth Quarter 2013.”

IRA Investors

Nearly four out of 10 U.S. households, or 46 million, owned at least one type of IRA as of mid-2013 (Figure 7.15). Traditional IRAs—those introduced under ERISA—were the most common type, owned by 36 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. Nine million U.S. households owned employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, or SIMPLE IRAs).

Figure 7.15

46 Million U.S. Households Owned IRAs

May 2013

  Year created Number of U.S.
households
with type of IRA
Percentage of U.S.
households
with type of IRA
Traditional IRA 1974
(Employee Retirement Income Security Act)
36.0 million 29.4%
SEP IRA 1978
(Revenue Act)
9.2 million 7.5%
SAR-SEP IRA 1986
(Tax Reform Act)
SIMPLE IRA 1996
(Small Business Job Protection Act)
Roth IRA 1997
(Taxpayer Relief Act)
19.1 million 15.6%
Any IRA   46.1 million 37.6%

Download an Excel file of this data.

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, 2013.”

Although most U.S. households are eligible to make contributions to IRAs, few do so. Indeed, only 15 percent of U.S. households contributed to any type of IRA in tax year 2012. In addition, very few eligible households made “catch-up” contributions to traditional or Roth IRAs.

Instead, investment returns and rollovers from employer-sponsored retirement plans have fueled the growth of IRAs. In any given year, a small portion of traditional IRA investors 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 year-to-year. For example, of investors with traditional IRAs at year-end 2012, 40.2 percent made rollovers between 2007 and 2012, with nearly 10 percent making a rollover in 2012 (Figure 7.16). The proportion of traditional IRA owners that have ever made a rollover is higher because typically different investors make rollovers each year. Of U.S. households owning traditional IRAs in May 2013, 49 percent (or nearly 18 million) had traditional IRAs that included rollover assets, according to an ICI household survey (Figure 7.17). Among traditional IRA–owning households with rollovers, 34 percent had rolled over recently (2010 or later) while 18 percent had not had rollovers since before 2000. In their most recent rollover, most of these households (85 percent) transferred their entire retirement plan balances into traditional IRAs.

Figure 7.16

Many Traditional IRA Investors Have Made Rollovers

Percentage of traditional IRA investors aged 25 to 74, year-end 2012

Figure 7.16

Download an Excel file of this data.

Note: Rollovers made prior to 2007, as well as rollovers made prior to a change in financial services providers, cannot be identified in the database.
Source: The IRA Investor Database™. See ICI Research Report, “The IRA Investor Profile: Traditional IRA Investors’ Activity, 2007–2012.”


Figure 7.17

Rollovers Are Often a Source of Assets for Traditional IRA Investors

Figure 7.17

Download an Excel file of this data.

Source: ICI Research Perspective, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2013”

Households owning IRAs generally are headed by middle-aged individuals (median age of 52 years) with moderate household incomes (median income of $80,000). These households held a median of $50,000 in IRAs. In addition, many households held multiple types of IRAs. For example, 34 percent of households with traditional IRAs also owned Roth IRAs, and 14 percent also owned employer-sponsored IRAs.

Traditional IRA Portfolios

IRA owners are more likely to hold mutual funds, especially long-term mutual funds, in their IRA portfolios than any other type of investment (Figure 7.18). Sixty-three percent of IRA-owning households had IRA assets in mutual funds. Nearly 85 percent of these households—53 percent of all IRA-owning households—held at least some of their IRAs in equity mutual funds. Fewer households owned other types of investments in their IRAs: 40 percent held individual equities, 33 percent held annuities, and 24 percent held bank deposits.

Figure 7.18

Households Invested Their IRAs in Many Types of Assets

Percentage of U.S. households owning IRAs, May 2013

Mutual funds (total) 63
    Equity mutual funds 53
    Bond mutual funds 34
    Hybrid mutual funds 28
    Money market funds 27
Individual equities 40
Annuities (total) 33
    Fixed annuities 22
    Variable annuities 22
Bank savings accounts, money market deposit accounts, or certificates of deposit 24
Individual bonds (not including U.S. savings bonds) 13
U.S. savings bonds 11
ETFs 10
Other 5

Download an Excel file of this data.

Note: Multiple responses are included.
Source: ICI Research Perspective, “Appendix: Additional Data on IRA Ownership in 2013”

At year-end 2012, younger IRA investors had 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 hybrid funds and fixed-income investments. For example, traditional IRA investors in their thirties had, on average, more than 50 percent of their assets in equities and equity funds and another 17 percent in target date funds (Figure 7.19). 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 hybrid funds (11 percent). Investors in their thirties held about 29 percent of their assets in these three asset categories.

Figure 7.19

Traditional IRA Asset Allocation Varied with Investor Age

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

Figure 7.19

Download an Excel file of this data.

1 Other investments include certificates of deposit and unidentifiable assets.
2 Equity funds include equity mutual funds, equity closed-end funds, and equity ETFs.
3
A target date (also known as lifecycle) 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 Hybrid funds invest in a mix of equities and fixed-income securities.
5 Bond funds include bond mutual funds, bond closed-end funds, and bond ETFs.
Note: Percentages are dollar-weighted averages.
Source: The IRA Investor Database™. See ICI Research Report, “The IRA Investor Profile: Traditional IRA Investors’ Activity, 2007–2012.”

Distributions from Traditional IRAs

Of households with traditional IRAs in May 2013, 21 percent took withdrawals in tax year 2012 (Figure 7.20). Withdrawals from traditional IRAs were typically modest: the median withdrawal in tax year 2012 was $6,500 and 40 percent of withdrawals totaled less than $5,000. The median ratio of withdrawals to account balance was 7 percent.

Figure 7.20

Withdrawals from Traditional IRAs Are Infrequent

Figure 7.20

Download an Excel file of this data.

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 Households that made withdrawals exclude those that closed and no longer own traditional IRAs.
Source: ICI Research Perspective, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2013”

Often, withdrawals from traditional IRAs were taken to fulfill required minimum distributions (RMDs). An RMD is a distribution equal to a percentage of the IRA balance, based on remaining life expectancy. Traditional IRA owners age 70½ or older must withdraw at least the minimum amount each year or pay a penalty. In tax year 2012, 66 percent of individuals who took traditional IRA withdrawals stated they did so to comply with RMD rules.

Of the 21 percent of traditional IRA–owning households who reported taking withdrawals in tax year 2012, 76 percent reported that the head of household, the spouse, or both were retired. Of retired households that took traditional IRA withdrawals in tax year 2012, 38 percent reported using some or all of the withdrawal amount to pay for living expenses (Figure 7.21). Other uses included reinvesting or saving in another account (31 percent), paying for a healthcare expense (12 percent), and buying, repairing, or remodeling a home (16 percent).

Figure 7.21

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

Percentage of traditional IRA–owning households by retirement status,1 May 2013

  Retired1, 2 Not retired3
Use of traditional IRA withdrawal
Took withdrawals to pay for living expenses 38 19
Spent it on a car, boat, or big-ticket item other than a home 6 12
Spent it on a healthcare expense 12 9
Used it for an emergency 9 17
Used it for home purchase, repair, or remodeling 16 19
Reinvested or saved it in another account 31 24
Paid for education 3 7
Some other use 14 8

Download an Excel file of this data.

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 16 percent of traditional IRA–owning households that were retired and took withdrawals reported in Figure 7.20.
3 The base of respondents includes the 5 percent of traditional IRA–owning households that were not retired and took withdrawals reported in Figure 7.20.
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, 2013.”

Traditional IRA–owning households that reported taking withdrawals in tax year 2012 and were not retired indicated a slightly different pattern of uses for the withdrawals. The nonretired households with withdrawals were half as likely to indicate using some or all of the money for living expenses (19 percent) than the retired households (38 percent) (Figure 7.21). Nonretired households were more likely to indicate that they needed to use some or all of the withdrawal for an emergency (17 percent) or for home purchase, repair, or remodeling (19 percent) than were retired households. Seven percent of nonretired households with withdrawals indicated that they used some or all of the money to pay for education expenses.

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 2013 that did not take a withdrawal in tax year 2012, 66 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 2012 or (2) not retired reported a pattern for the expected role of their future IRA withdrawals in retirement that is consistent with the use of withdrawals among those who withdrew in tax year 2012. Sixty-three percent of these households reported they plan to use IRA withdrawals to pay for living expenses in retirement, and 63 percent reported they plan to use IRA withdrawals for an emergency.

The Role of Mutual Funds in Households’ Retirement Savings

At year-end 2013, mutual funds held in DC plans and IRAs accounted for $6.5 trillion, or 28 percent, of the $23.0 trillion U.S. retirement market. The $6.5 trillion in mutual fund retirement assets made up 43 percent of all mutual fund assets at year-end 2013. Retirement savings accounts held half of long-term mutual fund assets industrywide but a much smaller share of money market fund assets industrywide (14 percent). Similarly, mutual funds held in DC plans and IRAs accounted for 52 percent of household long-term mutual funds but only 21 percent of household money market funds (Figure 7.22).

Figure 7.22

Households’ Mutual Fund Assets by Type of Account

Billions of dollars, year-end 2013

Figure 7.22

Download an Excel file of this data.

1 Mutual funds held as investments in 529 plans and Coverdell ESAs 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 DC plans include 401(k) plans, 403(b) plans, 457 plans, Keoghs, and other DC plans without 401(k) features.
Note: Components do not add to the total because of rounding.

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 2013, investors held slightly more mutual fund assets in DC plans ($3.5 trillion, or 60 percent of total DC plan assets) than in IRAs ($3.0 trillion, or 45 percent of total IRA assets) (Figure 7.23). Among DC plans, 401(k) plans held the most assets in mutual funds, with $2.7 trillion, followed by 403(b) plans ($442 billion), other DC plans ($308 billion), and 457 plans ($101 billion).

Types of Mutual Funds Used by Retirement Plan Investors

Retirement investors tend to hold equity investments. At year-end 2013, 58 percent of the $6.5 trillion in mutual fund retirement assets held in DC plans and IRAs were invested in domestic or world equity funds (Figure 7.23). 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 $2.9 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 hybrid funds. At year-end 2013, 22 percent of mutual fund assets held in DC plans and IRAs were held in hybrid funds, which invest in a mix of equity, bond, and money market securities. At year-end 2013, the remaining 20 percent of mutual fund assets held in DC plans and IRAs were invested in bond funds and money market funds. Bond funds held $893 billion, or 14 percent, of mutual fund assets held in DC plans and IRAs, and money market funds accounted for $379 billion, or 6 percent.

Figure 7.23

Majority of Mutual Fund Retirement Account Assets Were Invested in Equities

Billions of dollars, year-end 2013

  Equity  
Domestic World Hybrid1 Bond Money market Total
IRAs2 $1,244 $393 $627 $465 $230 $2,959
DC plans 1,641 483 809 427 149 3,511
   401(k) plans 1,197 387 670 307 98 2,659
   403(b) plans 271 38 76 36 21 442
   457 plans 54 15 16 15 1 101
   Other DC plans3 119 43 47 70 29 308
Total 2,885 876 1,437 893 379 6,470

Download an Excel file of this data.

1Hybrid funds invest in a mix of equities and fixed-income securities. The bulk of target date and lifestyle funds is counted in this category.
2IRAs include traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs).
3Other DC plans include Keoghs and other DC plans without 401(k) features.
Note: Components may not add to the total because of rounding.

Target Date and Lifestyle Mutual Funds

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 $977 billion at year-end 2013 (Figure 7.24), up from $773 billion at year-end 2012. Target date mutual funds’ assets were up 28 percent in 2013, increasing from $481 billion to $618 billion. Assets in lifestyle mutual funds grew 23 percent in 2013, rising from $292 billion to $359 billion. And the bulk (90 percent) of target date mutual fund assets was held in retirement accounts, compared with 40 percent of lifestyle mutual fund assets.

The Role of Mutual Funds in Households’ Education Savings

Twenty-five percent of households that owned mutual funds in 2013 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. And 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.

Figure 7.24

Target Date and Lifestyle Mutual Fund Assets by Account Type

Billions of dollars; year-end, 2002–2013

Figure 7.24

Download an Excel file of this data.

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.

Assets in Section 529 savings plans increased 21 percent in 2013, with $205.1 billion at year-end 2013, up from $168.9 billion at year-end 2012 (Figure 7.25). As of year-end 2013, there were 10.4 million Section 529 savings plan accounts, with an average account size of approximately $19,700.

Figure 7.25

Section 529 Savings Plan Assets

Billions of dollars; year-end, 2001–2013

Figure 7.25

Download an Excel file of this data.

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

In 2013, 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 56 percent younger than 45 (Figure 7.26). Heads of households saving for college had a range of education attainment: 49 percent had less than four years of college and 51 percent had four years or more. These households also had a range of incomes: 40 percent earned less than $75,000; 13 percent earned between $75,000 and $99,999; and 47 percent earned $100,000 or more. Two-thirds of these households had children (younger than 18) in the home, and 45 percent had more than one child in the home.

Figure 7.26

Characteristics of Households Saving for College

Percentage of U.S. households saving for college,1 May 2013

Age of head of household2
Younger than 35 24
35 to 44 32
45 to 54 23
55 to 64 12
65 or older 9
Education level
High school graduate or less 17
Associate’s degree or some college 32
Completed college 21
Some graduate school or completed graduate school 30
Household income3
Less than $25,000 6
$25,000 to $34,999 7
$35,000 to $49,999 10
$50,000 to $74,999 17
$75,000 to $99,999 13
$100,000 or more 47
Number of children in home4
None 33
One 22
Two 27
Three or more 18

Download an Excel file of this data.

1 Households saving for college are households that own education savings plans (Coverdell ESAs or 529 plans) or that responded that 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 2012.
4
The number of children reported is children younger than 18 living in the home.