Even though individual retirement accounts (IRAs) were designed to be tax-preferred alternatives to employer-sponsored retirement plans, most assets in these vehicles are rolling over from 401(k)s, according to a study by the Center for Retirement Research (CRR).
Today, IRAs still dominate private retirement assets. By the end of the third quarter of 2016, $7.8 trillion dollars were invested in these vehicles. The figure far exceeds those invested in defined contribution (DC) and defined benefit (DB) plans, which account for $5.7 trillion and $3.3 trillion respectively.
The study also surveyed some of the characteristics of the typical IRA account holder. CRR notes that most tend to be white, college educated, and already contributing to a 401(k). The organization concludes that “IRAs – as currently used – have drifted very far from their original intent of providing tax-preferred retirement saving for those without an employer plan. These vehicles currently do little to encourage retirement saving, but rather serve as the landing place for assets originally accumulated in 401(k) plans.”
The main reasons, CRR surmises, are that employees rarely want to leave money with their old employers and moving over assets into a second employer-sponsored retirement plan is often difficult and time consuming. However, several industry leaders are actively pushing to make auto-portability the standard.
Nonetheless, IRAs continue to be a driving force. Although most assets in these plans are flowing from previous employer plans, individuals’ contributions account for about 13% of new IRA assets each year.
According to the Investment Company Institute (ICI), 43 million households or 43% of the total owned IRA accounts. But the industry may soon need to shift notions of these vehicles back to basics. Rather than being the easiest alternative to moving assets to another employer’s plan, these can serve as the default option for those not saving through an employer-sponsored retirement plan. The CRR notes that congressional action could be taken in order to automatically enroll those not saving through an employer into an IRA, with the choice to opt-out. However, political uncertainty especially as it relates to tax reform still persists. But, the CRR notes that even though the course for retirement savings reform seems to be lagging at the federal level, states are moving on to create a framework whereby citizens can be auto-enrolled into a state-run retirement plan if they lack access through an employer.
Access to the full brief “Who Contributes to Individual Retirement Accounts?” can be found at crr.bc.edu.