Roth Growth Far Outpaces Traditional IRAs

Roth IRA balances grew at twice the rate of traditional individual retirement accounts (IRAs) between 2010 and 2012, according to a new analysis from the Employee Benefit Research Institute (EBRI).

The analysis looks at the investment behaviors of Roth and traditional IRA owners, as tracked by the EBRI IRA Database, and finds the median asset increase for Roth owners was 16.6% between the start of 2010 and year-end 2012. Traditional IRA owners, on the other hand, saw assets grow just 7.9% during the same period.

A major factor in the different rates of increase, according to EBRI, was that new contributions made up a larger proportion of the Roth IRA balances due to the smaller average starting balances of Roth IRAs. Additionally, Roth owners were somewhat more consistent at making contributions each year, which had the impact of further magnifying Roth contributions over those made to traditional IRAs, EBRI explains.

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Researchers found that Roth IRA balances grew faster than traditional IRAs across each age group and for each gender. Looking at individuals who maintained an IRA account in the database throughout the three-year period, the overall average balance increased each year—from $95,431 in 2010 to $95,547 in 2011 and to $106,205 in 2012.

Interestingly, IRA owners whose balances originated as a rollover from another tax-qualified retirement plan also showed consistent growth, EBRI says, challenging the common assumption that IRAs founded with a rollover often fail to receive regular ongoing contributions (see “For IRAs, It’s All About the Rollover”). Only IRA owners age 70 and older—i.e., those who are legally required to start making withdrawals—saw balances decline from 2010 to 2012, EBRI says.

Craig Copeland, a senior research associate at EBRI and an author of the analysis, says EBRI’s IRA Database offers important insights for retirement planning professionals because it tracks IRA contributions longitudinally—not just as a snapshot in time. This allows for deeper insights into the behaviors of individuals in the sample, Copeland says.

For example, among traditional IRA owners, a snapshot analysis shows approximately 6% of IRA owners contributed to their IRA each year, but EBRI’s longitudinal data shows that over the three-year period approximately 10% of traditional IRA owners contributed in at least one year. Among Roth IRA owners, approximately 25% contributed in any one year, compared with 35% who contributed at some point over the three-year period.

“An annual snapshot of those contributing to IRAs doesn’t allow you to assess whether the same individuals were contributing on a regular basis, or if different people contributed in different years, whereas a consistent longitudinal sample of IRA owners does allow for this examination,” Copeland explains.

Other major findings from the EBRI IRA study include the following:

  • The overall average IRA account balance in 2012 was $81,660, while the average IRA individual balance (all accounts from the same person combined) was $105,001. Overall, the cumulative IRA average balance was 29% larger than the unique account balance, EBRI says.
  • Rollovers overwhelmingly outweighed new contributions in dollar terms. While almost 2.4 million accounts received contributions, compared with the 1.3 million accounts that received rollovers in 2012, EBRI says about 10 times as much was added to IRAs through rollovers, compared with contributions.
  • The average individual IRA balance increased with age for owners ages 25 or older, from $11,009 for those ages 25-29 to $192,961 for those ages 70 or older.
  • IRA owners were more likely to be male. In particular, those with an IRA originally opened by a rollover, or a SEP/SIMPLE IRA were more likely to be men. EBRI says men also had higher individual average and median balances than women. However, the likelihood of contributing to an IRA did not significantly differ by gender within the database.
  • Younger Roth IRA owners were much more likely to contribute to the Roth IRA than were older Roth IRA owners, with 43% of Roth owners ages 25 to 29 contributing to their Roth in 2012, compared with 21% of Roth owners ages 60 to 64.

The full report, “Individual Retirement Account Balances, Contributions, and Rollovers, 2012; With Longitudinal Results 2010–2012: The EBRI IRA Database,” is published in the May 2014 EBRI Issue Brief and is available online at www.ebri.org.

Switch Rates in Micro Market Signal Opportunities

Open architecture and an uptick in the use of co-fiduciary services are changing the landscape for investment firms, according to Retirement Research Inc.

Both trends fit the context of a greater focus on fiduciary responsibility, according to John Guido, principal of Retirement Research, which explores trends in a new report, “Retirement Markets 2014.”

The adviser’s business model and services continue to evolve, Guido tells PLANADVISER. The report shows growth opportunities clearly continue in the micro end of the market, he says. Turnover in plans looking to change administration or the adviser is rising. “The switch rates for companies with an existing plan are in the high single digits, 7% or 8%,” Guido says, “back to where they were pre-recession.”

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A healthy market and healthy investment results have driven asset growth, according to the report. While plan formation and participant growth were modest, turnover rates have bounced back. Especially in the small and middle markets, turnover is obviously the source of a majority of sales opportunities.

The adviser market also has undergone some considerable change, Guido says. “Today, retirement-centric advisers, those with 60% or more of their business focused on retirement, represent about 24% of all advisers,” he says. These advisers manage 55% of the retirement-related assets, and are moving more from a commission-only model to fee-based or hybrid model, often with a dual registration that allows an adviser to operate both a fee- and a commission-based practice.

“The data tells you there are more folks that have converted their business for a greater retirement focus,” Guido says. “They’re meeting plan sponsors’ need.” These changes really come on the heels of expanded fee disclosure, he feels. “The definition of fiduciary hasn’t changed, but plan sponsors have a heightened awareness of their fiduciary responsibilities,” he says. 

As a logical next step, plan sponsors increasingly look for advisers who are well educated in the retirement business, he says, who can assist with everything from vendor selection to monitoring the health of a plan.

Advisers as Fiduciaries

“Being an adviser means really being a partner,” Guido says. Interestingly, he says, since 2005, the number of retirement-centric advisers who consider themselves a fiduciary has increased 25%. In 2005, about half of advisers surveyed saw themselves as a fiduciary to the plan. Today, that number is closer to 80%.  

Fee disclosure, the report contends, created increasing downward pressure on fees and a greater reliance on advisers to provide fiduciary support. As advisers become more concentrated in retirement, Retirement Research predicts continued scrutiny on fees, and demand for low and no-load investment options is likely to rise.

Guido says the number of plan sponsors taking advantage of co-fiduciary services, such as those adopting 3(21) arrangements, has risen in the last few years. The data shows that nearly two-thirds of plans (68%) are currently covered by a 3(21) service. Of those plans, two-thirds use an adviser to provide the service. The remaining third use another third party. About 25% of plans use 3(38) services. “Advisers have been responding to this need for help with fiduciary service,” Guido says.

Of the firms Retirement Research profiles—which Guido describes as “the biggest of the major players”— 65% offer an open architecture fund platform. The increase is driven by plan sponsors’ growing concern with fiduciary responsibility, he says, which advisers meet by tweaking their business model, and vendors meet by providing an open selection of investments.

The last key factor is growing focus by providers on plan health reporting. “Providers are ahead of the curve on this,” Guido says, with many creating reporting mechanisms that are customizable for plan sponsors. Advisers can use this capability to show a plan sponsor what is going on with investments, participation, diversification of investments—all the factors that help determine the health of a plan.

“How retirement ready are we making these participants? That’s what it’s all about,” Guido observes. After identifying issues in a plan, the adviser can peer rate the plan and suggest strategies to improve those areas of the plan.  

Regulation around fee disclosure transformed both the market and how providers service it. Advisers have been ahead of the market, Guido feels, in anticipating needs of plan sponsors and meeting the challenge of greater fiduciary responsibility. The growth of open architecture and use of fiduciary services have made it easier for advisers to do what they need to do, he says, and made them more effective.

The “Retirement Markets 2014” report is available for purchase here.

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