The Income Challenge

Asset Allocation in 401(k) Plans Found to Often Change Significantly When Rolled Over to IRAs

Despite considerable educational effort, participants are often ‘lost’ once assets are moved

New research from the Employee Benefit Research Institute. Visit here to read the full brief

A new EBRI study suggests the asset allocation found in individual retirement accounts (IRAs) is often inconsistent with the asset allocation found in the 401(k) plans prior to rolling funds over into IRAs. The Issue Brief, “Comparing Asset Allocation Before and After a Rollover From 401(k) Plans to Individual Retirement Accounts,” finds that despite the fact that sponsors of 401(k) plans have devoted considerable resources to educating participants about asset allocation, the efforts are being lost when the assets are rolled over to IRAs.

“Most plan sponsors have added target-date funds to the plans’ fund lineups in order to make long-term investing automatic,” said Craig Copeland, EBRI Senior Research Associate and author of the report. “However, most of the assets in 401(k) plans are ultimately rolled over to IRAs if the assets are retained in tax-advantaged accounts. Consequently, how the assets end up being invested in IRAs could either support or offset the allocations developed in the 401(k) plans, and from this analysis, the asset allocation found in IRAs is, in many cases, not consistent with the asset allocation found in the 401(k) plans before rolling over to the IRAs.”Comparing Asset Allocation Before and After a Rollover From 401(k) Plans to Individual Retirement Accounts

Summary of the Issue Brief: Comparing Asset Allocation Before and After a Rollover From 401(k) Plans to Individual Retirement Accounts

Many sponsors of 401(k) plans have been focusing on educating participants about asset allocation and have added target-date funds to their plans’ fund lineups in order to make long-term investing automatic. However, most of the assets in 401(k) plans are ultimately rolled over to individual retirement accounts (IRAs) if the assets are retained in tax-advantaged accounts. Consequently, how the assets end up being invested in IRAs could either support or offset the allocations developed in the 401(k) plans. From this analysis, the asset allocation found in IRAs is, in many cases, not consistent with the asset allocations found in the 401(k) plans before rolling over to the IRAs.

This Issue Brief takes advantage of the Employee Benefit Research Institute’s (EBRI’s) unique participant-level databases to examine the asset allocation of 401(k) plan participants before vs. after a rollover to an IRA. A particular focus is for those allocating 100 percent to target-date/balanced funds in the 401(k) plan. This is of utmost concern as target-date funds were specifically designed to facilitate more diversified, time-horizon-appropriate asset allocations for the participants. 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. Changes are examined across the ages of participants and the amounts of the rollover balances.

The data for this Issue Brief consist of 401(k) plan participants who are identified as having rolled over their 401(k) plan assets to an IRA within the EBRI Integrated 401(k)/IRA Database. In this database, the 401(k) plan participants from the EBRI/ICI 401(k) Database are combined with the account owners in the EBRI IRA Database.

Target Date / Balanced Funds

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 percent on average in 401(k) plans vs. 13.4 percent on average in IRAs). In IRAs, assets were much more likely to be in money (29.2 percent on average in IRAs compared with 5.0 percent on average in 401(k) plans). The share allocated to equities, on average, was very similar across plan types — 46.2 percent in 401(k) plans and 43.4 percent in IRAs. Bonds and other assets were less likely to be used in IRAs on average than in 401(k) plans.

the asset allocation found in IRAs is, in many cases, not consistent with the asset allocations found in the 401(k) plans before rolling over to the IRAs...

There were substantial differences in the asset allocations in IRAs with balances less than $5,000 and $5,000 or more due to the large share of the smaller accounts being automatic rollovers from the 401(k) plans to the IRAs, which have a default investment to money market funds.

The relationship of the percentage of assets allocated to target-date/balanced funds and equities was not particularly strong between when the assets were in the 401(k) plans vs. the IRAs, especially for accounts with balances less than $5,000. For example, regardless of the share of the equity allocation in the 401(k) plan, a very high share of these accounts had less than 10 percent in equities 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 percent in equities, only 29.7 percent still had more than 90 percent in equities in the IRA after the rollover.

Regardless of the size of the account, the asset allocation in the 401(k) plan had a relatively low likelihood of matching the asset allocation 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. For IRA administrators, more education may be necessary for new account holders who do not use financial advisors, and easier or automatic mapping of asset allocations after the rollovers may be necessary when decisions are not made by the account holder.

Read the full issue brief here.