One of my favorite works of art is “A Sunday Afternoon on the Island of La Grande Jatte,” by Georges-Pierre Seurat. I was introduced to this painting in college via an art appreciation class at the Art Institute in Chicago. (The Institute makes a brief appearance in the film “Ferris Bueller’s Day Off.”) The subject matter isn’t really extraordinary — just a group of individuals scattered about a park taking in the scenery. But what amazed me the first time I got close to the painting — and still does to this day — is that Seurat created the image, and the marvelous color shadings in it, through the use of thousands (perhaps millions — the painting measures 7 feet by 10 feet) of individual dots.
Plan advisors know that IRAs are a vital component of U.S. retirement savings, representing more than 25% of all retirement assets in the nation. A substantial portion of these IRA assets originated in employment-based retirement plans, including DB and 401(k) plans. Little wonder that those accounts have been a focus of the pending fiduciary regulation re-proposal.
However, despite IRAs’ importance in the U.S. retirement system, there is a limited amount of knowledge about the behavior of individuals who own IRAs, alone or in combination with employment-based DC plans.
Consequently, the Employee Benefit Research Institute (EBRI) created the EBRI IRA Database, which for 2011 contained information on 20.5 million accounts with total assets of $1.456 trillion. When looking across the entire EBRI IRA Database, as of year-end 2011, 44.4% of the assets were in equities, 10.7% in balanced funds, 18.0% in bonds, 13.0% in money, and 13.8% in other assets. This allocation spread is roughly comparable to that found for 401(ks) in the EBRI/ICI 401(k) database at a comparable point in time.
But when you look inside the IRA database, some interesting aspects emerge. For example, the asset allocation differences between genders was minimal: bond, equity and money allocations were virtually identical. Moreover, in looking across IRA types, the average equity allocation at each age group was higher for owners of Roth IRAs than for owners of other IRA types. This is not surprising when you consider that a separate EBRI analysis also revealed that individuals contributing to Roth IRAs tend to be younger. Additionally, as the most recent report reveals, balanced funds have by far the largest asset allocations among young (under age 45) Roth IRA owners.
One might not be surprised to discover that both genders’ average allocations to bonds increased with age (starting at age 25), although the average amount allocated to balanced funds decreased as the age of both genders increased after age 25 — with the exception of men ages 75-84. And while equity allocations for both genders peaked and then plateaued for those ages 45-54, it then proceeded to increase for male owners age 85 or older.
As retirement plan advisors know, an IRA could be only part of an individual’s portfolio of retirement assets. That’s why the goal of the integration of the EBRI databases is to be able to look at the two largest sources of retirement assets (IRAs and DC plans) to examine owner behavior across (as well as within) the accounts and provide a better understanding of the decisions Americans make with their retirement savings.
Sometimes you need to see the big picture — and sometimes a better understanding of the big picture comes from connecting the dots.
Notes
The October EBRI Notes article, “IRA Asset Allocation, 2011” is online here.
Also see “The Generation in Roth IRA Contributions,” online here.
