[PDF] 401(k)/IRA Holdings in 2019: An Update from the SCF

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O , N -

????K?/IRA HOLDINGS IN ????: AN UPDATE

FROM THE SCF

* Alicia H. Munnell is director of the Center for Retirement Research at Boston College (CRR) and the Peter F. Drucker

Professor of Management Sciences at Boston College's Carroll School of Management. Anqi Chen is the assistant director

of savings research at the CRR.

Introduction

Though the economy has been overtaken by COVID-?u

and the ensuing recession, the Federal Reserve's m??u Survey of Consumer Finances (SCF) still provides a use- ful update on how retirement balances fared between m??? and m??u - three years of solid economic growth, strong stock market returns, and continued matura- tion of the ffi??(k) system. And given that the market is modestly higher in m?m? and most job losses have been borne by lower-paid workers without retirement plans, m??u balances may not be dramatically difierent from today. The big advantage of the SCF is that it provides information not only on ffi??(k) balances, much of which is available from nancial services rms, but also on household holdings in IRAs, which are largely rollovers from ffi??(k)s. This brief reports on household holdings in these two sources combined. The discussion proceeds as follows. The rst section describes the importance of ffi??(k) plans and

IRAs in the retirement income system. The second

section documents the trend in individual decisions regarding the accumulation of assets in ffi??(k)s. The good news is a slight increase in participation rates and greater use of target date funds; the bad news is the lack of universal coverage, at total contribution rates, high fees, and signicant leakages. The third section reports on ffi??(k)/IRA balances. The SCF shows - for households approaching retirement - an increase in these balances from $?,??? in m?? to $?ffiffi,??? in m??u. These balances will provide a couple with only $ ? per month in retirement. Moreover, only about half of households have ffi??(k)/

IRA balances; and, as dened benet plans phase out

en-USin the private sector, the rest will have no source of re- tirement income other than Social Security. The nal section concludes that today's ffi??(k) system provides meaningful benets only for the top two quintiles of the income distribution and that, for the employer- sponsored system to work efiectively, coverage must be universal.

The Role of ffi??(k)s/IRAs in

the Retirement System Retirement savings accounts - ffi??(k)s and IRAs - play an increasingly important role in the nation's retirement system for two reasons.

First, Social

Security, the backbone of the system, will provide less relative to pre-retirement earnings in the future, so B A H. M A C*

Center for Retirement Research

people will need more from their employer-sponsored plans. Second, employer-sponsored plans have shifted from traditional dened benet plans, which pay lifetime benets, to ffi??(k)s and IRAs, where bal- ances determine retirement resources.

Social Security

Social Security will replace less of workers" earnings for three reasons. First, the Full Retirement Age - the age at which a worker is entitled to full benets - is moving from ? to ? . As a result, those who con- tinue to retire at, say, ? will see a larger cut in their monthly benet relative to pre-retirement earnings (see Figure ?). Second, rising Medicare premiums, which are deducted before the check goes in the mail, will reduce the net Social Security benet. Finally, more Social Security benets will be subject to the personal income tax since the thresholds above which benets are taxable are not adjusted for ination or F S Note: Replacement rates for m? are based on scheduled benets, not payable benets. Sources: Centers for Medicare & Medicaid Services (); unpublished data from Medicare Trustees Report; and U.S.

Social Security Administration (m?m?).

Reported replacement rate (retirement at age 65)

After Part B SMI deduction

After personal income taxation

Reported replacementrate (retirement at age )

F E-S  Source: Authors" calculations based on U.S. Board of Gov- ernors of the Federal Reserve System, Survey of Consumer

Finances (SCF) (‹-).

wage growth. In addition to the changes that will occur under current law, Congress might cut ben- ets further to help eliminate the program's -year decit.

Employer-sponsored Plans

With Social Security replacing a smaller percentage of pre-retirement earnings, employer-sponsored retire- ment plans are increasingly important. Unfortu- nately, only about half of workers - at any moment in time - participate in either a dened benet plan or a ffi??(k) plan. That percentage has remained constant for decades (see Figure m). m

For those lucky enough to work for an employer

providing a retirement plan, the nature of these plans has changed from dened benet to ffi??(k) (see Fig- ure on the next page).

Issue in Brief

Source: Authors" calculations based on the ‹- S CF.

Defined benefit

onlyDefined contribution onlyBoth F

T  P, T

Source: U.S. Board of Governors of the Federal Reserve System, Financial Accounts of the United States ().

Defined

benefit

Defined

contribution IRA

While (k)s plans have spread dramatically, they

have essentially turned into a collection mechanism for retirement savings; participants eventually roll over the bulk of the money into IRAs. Today, IRA assets exceed those in ffi??(k)s by almost ? percent - $??.? trillion compared to $ .ffi trillion (see Figure ffi). Thus, any assessment of the current employer-spon- sored retirement system requires an evaluation of how well ffi??(k)s collect money and how much people have in their combined ffi??(k)/IRA holdings.

How Well Do ffi??(k)s Collect

Retirement Money?

When ffi??(k) plans began to spread rapidly in the ?u‹?s, they were viewed mainly as supplements to employer-funded pension and prot-sharing plans. Since ffi??(k) participants were presumed to have their basic retirement income needs covered, they were given substantial discretion over their ffi??(k) choices, including whether to participate, how much to con- tribute, how to invest, and when and in what form to withdraw the funds.

Participation

For those individuals oered a plan, success rst

requires that they participate. An extensive litera- ture has demonstrated that automatically enrolling employees sharply increases participation rates. ffi The share of plans with auto-enrollment increased sub- stantially in the wake of the Pension Protection Act of m??? (PPA), and now hovers around ? percent. Given the spread of plans with auto-enrollment, the upward trend in participation rates as reported in the

SCF may seem modest (see Figure ). One factor is

that participation rates in plans without auto-enroll- ment have been declining. F

Œ Wˆ

Sources: U.S. Bureau of Labor Statistics (); and authors" calculations based on the ?uu‹-m??u SCF. F ‡. Wˆ Ž

Center for Retirement Research

ffi

Contributions

Once in the plan, participants have to decide how

much to contribute. Average employee contribution rates continue to hover around percent (see the gray bars in Figure ?). Employer contributions bring the total average deferral rate to ??. percent.

While in

prior years, lower contribution rates for those auto- matically enrolled appeared to reduce the average, that efiect no longer exists. F ‚. A€ E E

Source: Vanguard ().

EmployerEmployee

Moving from the average contribution rate to

the maximum, employees in m??u were entitled to contribute $?u,?? on a tax-deductible basis to their ffi??(k) plan. In addition, workers approaching retirement could contribute another $?,?? under “catch-up" provisions introduced in m??m. In m??u, ?m percent of Vanguard participants - mostly high earners - reached their limit. Since Vanguard tends to have a disproportionate number of large plans and, therefore, higher earners, the percentage maxing out is probably slightly lower for the ffi??(k) population as a whole. F

Source: Vanguard ().

Plans offering target date funds

Participants using target date funds

Investment Decisions

In addition to participation and contribution deci- sions, employees must decide how to invest their money. This process has been simplied signicantly with the advent of target date funds, which ensure that investments are diversied and rebalanced over time (see Figure u

The other benet of these funds

is that they reduce the likelihood of investing in employer stock, which helps to further diversify the participant's portfolio both across stocks and away from the employer. According to Vanguard, only ‹ percent of rms ofier their own company's stock in their ffi??(k) plans.

Even with the spread of target date funds, fees

remain an important issue. An expense ratio of ? percent - ??? basis points - over a ffi?-year worklif e will reduce assets at retirement by almost m? per- cent.

And despite a decline over time, expense

ratios on mutual funds - the primary investment vehicle in ffi??(k) plans - remain high. Based on how people actually invest, the expense ratio in m??u was m basis points for equity funds, ffi‹ basis points for bond funds, basis points for target date funds, and m basis points for money market funds (see Figure ‹ on the next page).

Issue in Brief

1.1%1.5%2.9%

0%

1%2%3%

4%

VanguardHousehold surveysTax data

F

 S

Sources: Vanguard () and Munnell and Webb ().

Source: Vanguard (

Agesm???m??u

All$mffi,

?$m, -ffiffi m,ffiu? m?,?‹‹ ffi-ffi ffi,ffi? ffi?,? -?ffi ??,?ffi ?u,?u

Keeping Money in the Plan

Over the last decade, researchers have undertaken

a number of studies to estimate the magnitude of leakages out of ffi??(k)s and IRAs.

In addition, each

year Vanguard provides data on ows into and out of the dened contribution accounts that it administers. Based on these data, the leakage rate is ?.? percent (see Figure u). The Vanguard numbers, however, must be viewed as a lower bound, since the company administers only about ?ffi percent of the market and large plans are overrepresented in its data. Large plans - with higher-paid employees - most likely have lower leakage rates. Indeed, studies from household survey data looking at leakages out of ffi??(k)s and

IRAs put the gure at ?. percent.

?m

And studies

using tax data suggest an even higher leakage rate. Leakages from cashouts at the time of a job change remain the most serious problem.

Reported (k) Balances: and

btor As a prelude to looking at the new SCF data, it is use- ful to examine median ffi??(k) balances as reported by

Vanguard.

?ffi

As Table ? shows, these balances predict-

ably rise with age and increased slightly between m??? and m??u. F

 Œ T

 F, B

P

Source: Investment Company Institute ().

EquityBondTarget dateMoney market

Although these individual (k) balances provide

a hint of what to expect in the m??u SCF, three factors make it impossible to determine from these numbers how much money households have accumulated for retirement. First, when participants change jobs, their ffi??(k) accounts may remain with their old em- ployer, so individuals may have more than one ffi??(k) account. Second, ffi??(k) balances may be rolled over to an IRA, and nancial services companies cannot track combined ffi??(k)/IRA holdings. Third, by ne- cessity, balances are provided on an individual, rather than a household, basis. For all these reasons, the new SCF data are crucial.

Center for Retirement Research

ffi??(k)/IRA Balances in the m??u SCF To calibrate the Federal Reserve's m??u SCF to the numbers from nancial services rms, the best place to start is with single individuals. Table m shows SCF median ffi??(k) and combined ffi??(k)/IRA balances for working individuals with a ffi??(k) in m??? and m ??u. The SCF ffi??(k) balances are higher than the Van- guard numbers, most likely because they represent all the accounts held by an individual. But basically, the patterns by age and magnitude look consistent.

Adding IRA balances shows that focusing only on

ffi??(k)s signicantly understates retirement saving by workers. In m??u, the typical worker approaching retirement (ages -?ffi) with a ffi??(k) had a bal ance of $?m?,??? in combined ffi??(k)/IRA accounts, u p from $??,??? in m???. Note that the gain is a little less in real terms since these gures are not adjusted for ination.

TΠ.... M

 Wˆ

I

Source: Authors" calculations from the and S

CF.

Median ffi??(k)Median ffi??(k)/IRA

Agesm???m??um???m??u

-ffiffi$mu,???$ffi?,???$ ffi-ffi??,????,???‹?,???u?,??? -?ffi ?,???‹ffi,?????,????m?,??? F

Wˆ

H  Ž Note: Sample excludes households that are not working and those that have only an IRA.

Source: Authors" calculations from the - SCF.

Ages of head of household

TŒ ‡. M

H  Ž

Q

Source: Authors" calculations from the and S

CF.

Income

quintile

Median balancesPercentage with ffi??(k)

m???m??um???m??u

Lowest$m?,

?? $m,m?? m%m?% mnd m,??? ,???ffiffi‹ rd??ffi,???u ffith,ffi??m‹u,????m??

Highest

Total$?,???$?ffiffi,???m%m%

While the overall median for households ap-

proaching retirement was $?ffiffi,???, up from $?,??? in m???, the amount and pattern o f increase varied signicantly by household income. Balances for the highest quintile were $‹?,?? in m?? u com- pared to $

‹?,??? in m??? and the share of h

igh- income households with ffi??(k) balances rose from ? percent to percent (see Table ). In contrast, for the lowest quintile, even with rapid growth, balances Individuals live in households, and the great virtue of the SCF is that it provides data on retirement assets at the household level. In m???, the typical working household approaching retirement with a ffi??(k) had $?ffiffi,??? in ffi??(k)/IRA balances (see Figure ??).

This amount compares to $?,??? in m???.

The ffi??(k)/IRA balances for the households

approaching retirement will produce only a modest supplement to Social Security. If the couple uses their $?ffiffi,??? to buy a joint-and-survivor annuity, they will receive $ ? per month.

Since this amount

is not indexed for ination, its purchasing power will decline over time. Moreover, this $ ? is likely to be the only source of additional income, because the typical household holds virtually no nancial assets outside of its ffi??(k).

Issue in Brief

amounted to only $m,m?? and the share of house- holds with a ffi??(k) declined from m percent to m? percent. For households in the middle quintile, both balances and the percentage with a ffi??(k) declined.

Retirement accounts appear to serve as a meaning-

ful source of saving only for the upper two quintiles. Even there, however, a signicant minority of house- holds have no ffi??(k) balances.

One interesting question is how much should

we expect to see in these (k)/IRA accounts. In an attempt to answer that question, take a representative individual age m with median earnings in ?u‹ffi who reaches age ?? in m??u, assume that he contributed ? percent of salary and received a ?-percent match from his employer, had a ?:? stock/bond alloca- tion, and received actual investment returns over the period. This individual would have accumulated $ffim,??? (see Figure ??). F

 , F ,

Source: Authors" estimates based on Biggs, Munnell, and

Chen (m??u).

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