Skip to main content

You are here


EBRI: IRA Rollovers Often Deviate from 401(k) Asset Allocations

IRA Rollover

The asset allocation found in IRAs in many cases is drastically inconsistent with the asset allocation found in the 401(k) plans before rolling over to IRAs, according to a new issue brief from EBRI.  

As such, the organization warns that despite 401(k) plan sponsors devoting considerable resources to educating participants about asset allocation, the efforts are “being lost” when the assets are rolled over to IRAs.

In “Comparing Asset Allocation Before and After a Rollover From 401(k) Plans to Individual Retirement Accounts,” EBRI takes advantage of its participant-level database to examine the differences in asset allocations, with a particular focus on those allocating 100% to target-date/balanced funds in the 401(k) plan. 

According to the brief, when the individuals were 401(k) plan participants, they were much more likely to have assets in target-date/balanced funds than when their assets were moved to IRAs – 27.5% on average in 401(k) plans versus 13.4% on average in IRAs. In IRAs, however, assets were much more likely to be in money market funds (MMFs) – 29.2% on average in IRAs compared with 5% in 401(k) plans. 

This issue was particularly acute for small-balance rollovers of less than $5,000, as a large percentage of these assets ended up in MMFs as a default investment in the IRAs, even if the assets were 100% invested in target-date/balanced funds in the 401(k) plans. For these accounts, the average allocation to MMFs was nearly 77% – only 11.2% went to target-date/balanced funds in the IRAs. In contrast, when IRA rollover balances were $5,000 or more, the average allocation to MMFs was nearly 25%, equities 35.6% and target date/balanced funds 30%.

EBRI’s brief suggests that this is a concern as TDFs were specifically designed to facilitate more diversified, time-horizon-appropriate asset allocations for participants. 

“Glaring differences” were also found between the allocations of account owners who had more than 90% of their assets in equities in their 401(k) plan when balances were less than $5,000, compared to balances of $5,000 or more. In this case, the average allocation to MMFs in IRAs for accounts with rollover balances less than $5,000 was 70.5%, with only 18% going to equities. In contrast, EBRI notes that when such IRAs had rollover balances of $5,000 or more, the average allocation to equities was 58.5%. 

“If assets are not being allocated the same way when they end up in an IRA, this could indicate that IRA owners are losing an important investment strategy once they leave the 401(k) plan,” writes Craig Copeland, EBRI Senior Research Associate and author of the brief.

EBRI further notes that, regardless of the account size, the asset allocation in the 401(k) plan had a relatively low likelihood of matching the asset allocation in the IRA after the rollover. For accounts with balances of $5,000 or more, the relationship between the equity allocations in the account types was stronger but still not particularly strong. Specifically, of the 401(k) plans with more than 90% in equities, less than 30% still had more than 90% in equities in the IRA after the rollover.

“This has implications for plan sponsors that are trying to help their participants make the best decisions within the plans, which may mean they need to encourage the participants to retain their assets in the plan or directly remind former participants what their allocations were before the rollover,” Copeland says.  

Facilitating the movement of the IRA assets of those still working back into 401(k) plans, such as through auto portability measures, is one suggestion that could help achieve the longer-term asset allocation strategies that have been developed in 401(k) plans, particularly for accounts with lower balances. EBRI also notes that an examination of the default investment in automatic rollovers may be warranted.

For IRA administrators, the brief suggests that more education may be necessary for new account holders who do not use financial advisors, along with perhaps easier or automatic mapping of asset allocations after the rollovers when decisions are not made by the account holder.