Having Both a 401(k) and an IRA Leads to Higher Retirement Savings

The ratio of the combined 401(k) and IRA balance to the average 401(k) plan balance was 2.48.

In a new Issue Brief—“Having Both a 401(k) Plan and an IRA: How Much Does This Change the Retirement Asset Picture?”—the Employee Benefit Research Institute (EBRI) examined how much better off investors who hold both types of accounts are.

By the end of the study, EBRI found that the ratio of the average combined 401(k) plan and individual retirement account (IRA) balance to the average 401(k) plan balance was 2.48, and the average combined balance to the average IRA balance was 2.53 times higher.

However, EBRI found that many individuals failed to make contributions to both accounts in all the years studied. Accounts were closed when individuals changed jobs, or assets were rolled over as individuals retired.

Finally, maintaining just a 401(k) plan generated as much in balances as the amount generated by individuals who owned both accounts at some points in the period studied.

EBRI found that those who owned both types of accounts owned their IRA for 5.5 years, compared with four years of owning a 401(k).

EBRI said it conducted this study because it wanted to have a more “complete picture of the amount of retirement assets workers or retirees have accumulated.”

The institute found that the growth of the average 401(k) plan balance was higher than the growth of the average IRA balance. The average 401(k) balance in year three was 1.6 times higher the initial balance and, by year six, 2.24 times higher. By comparison, the growth of IRA balances was 1.35 and 1.58, respectively.

EBRI says it is not surprising that 401(k) balances grow at a faster rate, given the fact that these plans are more likely to receive contributions than IRAs and have higher annual contribution limits than IRAs. In addition, there is often a company match in a 401(k). EBRI also said the growth of the average combined balances of those maintaining both a 401(k) and an IRA throughout the study was close to the 401(k) plan growth: 1.55 times the initial year value by year three and 2.15 times in year six.

In conclusion, EBRI says, “any reporting on retirement assets that focuses on the average balance of only 401(k) plans or IRAs does not create a complete picture of the amount of retirement assets workers or retirees have accumulated. Many individuals hold multiple 401(k) plans and IRAs—especially as they grow older and move from job to job. By combining the EBRI/ICI [Investment Company Institute] 401(k) Database of 27 million plan participants with the EBRI IRA Database of 19 million accountholders, a unique perspective on the relative amount of assets held by those having both account types can be provided. Indeed, maintaining both account types throughout the entire study period resulted in an average amount of combined assets that was about 2.5 times larger than the average 401(k) plan balance and a median combined balance that was approximately 3.5 times the median 401(k) plan balance.

“This study shows the potential of what can be accumulated in total if workers are able to maintain both account types throughout their working lives, or large portions of them,” the report continues. “It also shows that this potential is not always met, as workers change jobs, stop contributing or take money out of [or] close their accounts, resulting in retirement asset leakage.”