Data & Research August 15, 2012

Some Participants Use Simple Math to Allocate Investments

Some defined contribution participants rely on simple math when deciding how to allocate their plan investments, research indicates.
Reported by

This was especially true when participants were presented with a larger number of investment menu choices. Researchers from Rutgers University; University of Pittsburgh; University of Texas, Austin; and Boston College found the number of participants selecting the default fund option increased as the size of the investment menu increased, but among those who actively selected investments, easy division was key to their decision making.  

The findings suggest that while most investors want to invest in a handful of funds, the total number they invest in may be systematically influenced by the total number of funds offered in the plan. Larger fund assortments may cognitively tax ordinary investors, who may then simply decide to not only increase the number they choose for their own portfolios, but also to divvy up their dollars evenly. 

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The study participants’ responses do not support the notion that when choosing from a larger assortment, choosing more funds or evenly allocating their dollars is motivated by the desire to create a more diversified portfolio.    

“[A] practical implication of our research is to provide insight and direction to fiduciaries responsible for designing and implementing retirement plans in the best interest of their employees,” the researchers said. “If fiduciaries can control which options investors consider, they can design mutual fund assortments more optimally to increase the likelihood of participation and the quality of decisions made.”  

The research report can be downloaded here.

 

Data & Research August 14, 2012

Roth IRA Conversion Levels Continue to Show Muscle in 2012

 

The average contribution to Fidelity Individual Retirement Accounts (IRAs) hit $3,930 in tax year 2011, up nearly 15% from 2007.

 

 

Reported by

In Fidelity Investments’ five-year analysis of IRA contributions double-digit percent contribution increases were seen across all age groups – from investors in their 20s to 70 and older.

Roth IRA conversion activity in 2012 continues to be double the level seen in 2009 – before income limits were removed.

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Fidelity’s analysis highlights positive contribution trends across all age groups. The average Roth IRA contribution for the 2011 tax year was $3,210 for those age 20 to 29, a 12.9% increase from 2007. For those 60 to 69, the average contribution was $4,690, a 13.4% increase from 2007.

“The historic market conditions over the last several years have jump-started many investors to take control of their personal economy and increasingly focus on saving for their retirement,” said Ken Hevert, vice president, Fidelity Investments. “These strong contribution rate increases also show more investors are leveraging the power of tax-advantaged vehicles like IRAs to achieve their retirement goals.”

 

(Cont’d…)

With income limits removed for Roth IRA conversions in 2010, investors are still continuing to examine the Roth IRA as a potential strategy within their overall retirement savings plan.

For the first half of 2012, Fidelity conducted more than 45,000 Roth IRA conversions, a slight increase over the number of conversions conducted during the same time last year, and more than double (109%) the number conducted within the same time frame in 2009 – before income limits were removed.

Usage trends of Roth and traditional IRAs were also examined, highlighting the various benefits of each account. Findings include:

 

  • Tax-free growth potential and withdrawals have made Roth IRAs a consistent favorite. On average, contributions to Roth IRAs have surpassed those made to traditional IRAs by 62.7% since tax year 2007.
  • For the past five years, investors in their 60s have had the highest Roth and traditional IRA contribution rates. For tax year 2011, these investors contributed on average $4,930 to Roth IRAs and $4,790 to traditional IRAs.
  • As many investors in their 50s cannot contribute to a Roth IRA because of income restrictions, they have the highest propensity toward using IRAs. For the past three tax years, on average 41.6% of their contributions are made to traditional IRAs.
  • Tax benefits add to the popularity of Roth IRAs, with 84% of all contributions made by investors in their 20s.

 

 

 

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