Retirement Plans Still Pumping Up Mutual Fund Ownership

More households own mutual funds inside tax-deferred accounts—such as defined contribution (DC) plans, individual retirement accounts (IRAs), and variable annuities—than outside these accounts, according to the Investment Company Institute.

The ICI study says about three-quarters of households that owned mutual funds through tax-deferred accounts held funds in employer-sponsored retirement plans. In 2008, 35.9 million households held mutual funds through employer-sponsored retirement accounts—14.4 million only inside employer-sponsored plans and 21.5 million both inside and outside these plans.

Mutual fund ownership has largely been fueled by the growth of DC plans. Last month, an ICI and Securities Industry and Financial Markets Associate (SIFMA) report revealed that while overall household equity ownership has fallen off since 2001, defined contribution retirement plan sponsorship by employers have kept equity ownership rates up (see “DC Plans Keep Equity Ownership Alive’).

According to the study, an estimated 52.5 million U.S. households, or 45%, owned mutual funds in 2008, and an estimated 48 million households owned mutual funds inside tax-deferred accounts, compared with 21 million households owning funds outside tax-deferred accounts. Among those households that owned funds outside tax-deferred accounts, about three-quarters also held funds in tax-deferred accounts.

ICI points out that the number of households owning mutual funds through tax-deferred accounts has grown by 12 million since 1998, while the number of households owning mutual funds outside tax-deferred accounts has stayed about the same.

Owner Demographics

Most U.S. mutual fund shareholders had moderate household incomes and were in their peak earning and saving years, according to the ICI study. About three in five U.S. households owning mutual funds had incomes between $25,000 and $99,999, and about two-thirds were headed by individuals between the ages of 35 and 64 in 2008.

DC Plan Investors View Mutual Funds Favorably

ICI’s new research found that more than seven in 10 investors who own mutual funds in DC retirement plans and are familiar with fund companies view fund companies favorably. The factors that influence shareholders with mutual funds in DC accounts’ perceptions of the fund industry are similar to those of all mutual fund owners.

Fund performance is the most important factor for 46% of all DC owners with mutual funds in their accounts. The opinion of professional financial advisers, personal experience with a mutual fund company, and stock market fluctuations, are also important to their views of mutual fund companies.

Shareholders with mutual funds in DC accounts are also confident that mutual funds can help them meet their financial goals, with retirement topping the list (97% invest to finance retirement and 83% rank retirement as their primary goal for their mutual funds).

Mutual funds’ favorability among all shareholders declined in 2008, as the stock market trended downward. Favorability fell to 73% from 77% in 2007, according to the ICI.

The study found more seasoned mutual fund investors reported higher favorability ratings compared with younger investors and those who bought mutual funds more recently. Eighty percent of mutual-fund -owning households with a household head aged 65 or older had a “very” or “somewhat” favorable rating of fund companies, compared with 72% of fund-owning households with heads younger than 35. Mutual funds’ favorability among households purchasing funds prior to 1990 was 77%, compared with 67% among households purchasing funds in 2000 or later.

The ICI report is available here.