A recent EBRI Issue Brief analyzed information from the Survey of Consumer Finances (SCF),[1. The Survey of Consumer Finances is, as its name suggests, a survey of consumer households “to provide detailed information on the finances of U.S. families.” It is conducted every three years by the Federal Reserve, and is eagerly awaited and widely used — from analysis at the Federal Reserve and other branches of government to scholarly work at the major economic research centers. The 2010 version was published in June.] and found some interesting trends in individual account retirement plans.
Wealth Generation from Retirement Accounts
To no one’s surprise, the median (or midpoint) net worth of American families decreased by 38.8% from 2007 to 2010. During that period the median value of family income also decreased (though at a much lower rate of 7.7%).
At the same time, DC plan balances came to represent a larger portion of families’ total financial assets among families with these plans, rising from 58.1% in 2007 to 61.4% in 2010. Defined contribution and/or IRA/Keogh account balances increased their share as well, from 64.1% of total family financial assets in 2007 to 65.7% in 2010. And, while regular IRAs account for the largest percentage of IRA ownership, advisors won’t be surprised to find out that in 2010, as the EBRI analysis reveals, rollover IRAs had a larger share of assets than did regular IRAs.
The Issue Brief notes, “[t]he employment-based system is generating much of this wealth from individual account retirement plans, because it includes, obviously, all of the defined contribution assets (especially from 401(k)s) as well as approximately 45% of IRA wealth,” as well as rollovers of lump sum distributions from defined benefit plans. [2. Lump-sum distributions are increasingly available in DB plans. For example, in 2010, 46% of full-time employees in private-sector DB plans were eligible for a lump-sum distribution (U.S. Department of Labor, 2011). That compares with 1997 and 1995, when 76% and 85%, respectively, of full-time workers participating in a DB plan in a medium or large establishment were not offered a lump-sum distribution (U.S. Department of Labor, 1999, 1998). A recent EBRI analysis of the distribution options for more than 33,000 participants in 84 defined benefit/cash balance plans found that in 2010 only about one in five had no lump sum option. Additional information will be available in a future EBRI publication.]
Retirement Account as Indicator
Perhaps also not surprisingly, the SCF data show that participation in an employment-based retirement plan was strongly linked to family income and to the family head’s educational level and race. However, in terms of net worth, families whose net worth was in the top 10% bracket were most likely to include a retirement plan participant in 2010, while the two net worth percentile breaks just below the highest had levels of participation similar to that of the highest net worth families. As recently as 2007, families in the lower levels of percentile of net worth were more likely to include a plan participant than those in the highest level.
However, the EBRI Issue Brief also looks at a comparison of the mean and median net worth across family income and age of family head, and finds that families with any type of individual account retirement plan (DC plan from current or previous employer or an IRA/Keogh plan) not only have larger amounts of wealth, but that wealth is substantially larger across each and every income group and head-of-household age group. Consider this: The median household wealth for a family with annual income of less than $25,000 that had an individual account retirement plan was $118,000, while the median household wealth for a family in the same income category, but with no individual retirement account, was $5,800.
It’s not surprising to find that those with more income or wealth are more likely to have an individual retirement plan account. However, it’s worth noting that the data suggest that those with an individual retirement plan account — any individual retirement plan account — at even the lowest income levels, seem to be much better off.
