The Finance of Longevity

Individual Account Retirement Plans Have Become a Key Financial Asset Among Families that Own Them

And where plans exist, net-worth trends much higher

New research on retirement-readiness from the Employee Benefit research Institute. Visit here.

New research by the Employee Benefit Research Institute (EBRI) finds that individual account retirement plan (IA plan) assets have exploded over the past several decades—becoming a key financial asset for families that own them.

According to data from the Survey of Consumer Finances, between 1992 and 2016, the median amount of financial assets attributable to IA plans for families owning them rose by more than half, where IA plans account for more than two-thirds of these families’ financial assets (67.9 percent in 2016). This is up from 44.3 percent of financial assets in 1992.

In particular, at the median, IA assets are the largest share of financial assets for families with heads ages 35-64, incomes of $25,000-$100,000, and net worth between the 25th percentile and 90th percentile.

Higher Net Worth

Specifically, among families that own them, the median proportion of financial assets that IA plan assets represent is:

  • 76.9 percent for families where the head is ages 45-54
  • 70.3 percent for families whose annual income is between $50,000 and $100,000
  • Between 70.9 percent and 73.1 percent for families whose net worth is between the 25th percentile and 90th percentile

“Not only do individual account assets make up a large portion of the financial assets of those that own them, but families with individual account assets have substantially higher levels of net worth than those without them,” says Craig Copeland, Senior Research Associate at EBRI. Copeland notes that the median net worth of those owning IA assets was $249,950 in 2016, compared with $19,200 for families without such assets. Further, families with IA assets are also more likely to own a home than those without these assets. “Individual account assets are clearly an important source of assets for families that own them.

Consequently, when it comes to policies that may affect them, these plans should be considered carefully,” concludes Copeland.

Excerpts from Individual Account Retirement Plans: An Analysis of the 2016 Survey of Consumer Finances

Trends in Individual Account Retirement Plan
Ownership Employment-based plans are generally categorized as either defined benefit plans (pensions—traditional or cash balance) or defined contribution plans (401(k)-type plans). Generally, traditional defined benefit plans provide benefits according to a formula based on the worker’s tenure and salary history, and are not directly affected by the changes in the investment returns of the plan assets. Contributions to these plans are generally made by the employer and in some cases (most notably in the public sector) also by the individual participant. So-called hybrid individual account defined benefit plans, most commonly cash balance plans, provide benefits that are generally based on contributions by the sponsor and a credit rate set by the plan.

By contrast, defined contribution plans provide benefits that are determined by the level of contributions (both from the worker and the employer) and any asset returns on these contributions. Workers not eligible for a plan through employment, and in some cases workers wanting to augment employment-based plans, as well as nonworking spouses, can set up an individual retirement account; and many self-employed workers can establish a Keogh plan to save for retirement.

Employment-based Retirement Plans from Current Employers
In the 2016 SCF, 66.5 percent of all families that had an active participant in an employment-based retirement plan from a current employer were found to have a DC plan only (Figure 2). Furthermore, 16.2 percent of these families had both a DB and DC plan, while 17.2 percent had a DB plan only. Among these families with an active participant, a significant shift occurred from 1992 to 2016; the percentage having a DB plan only decreased from 40.0 percent in 1992 to the 17.2 percent in 2016, which was up from 15.3 percent in 2013. On the other hand, the percentage of those families having a DC plan only surged, rising from 37.5 percent in 1992 to just above 66 percent in 2013 and 2016.

Not only do individual account assets make up a large portion of the financial assets of those that own them, but families with individual account assets have substantially higher levels of net worth

The percentage of families with both types of plans decreased from 22.5 percent in 1992 to 16.2 percent in 2016. 10 The type of retirement plan a family has is linked to the demographic characteristics of the family and the family head. Families with the highest incomes were the most likely to have both a DB and DC plan. In 2016, 23.8 percent of families with income of $100,000 or more with a plan had both a DB and DC plan, compared with 4.9 percent of the families with income of $10,000–$24,999. 11 Also, families with heads ages 65-74 were the most likely to have both a DB and DC plan, and families with higher net worth were more likely to have both plans. However, across all demographic groups, families were most likely to have a DC plan only in 2016.

This is a significant change from 1992, when almost all categories were most likely to have had a DB plan only. For instance, in 1992, 57.9 percent of families with heads ages 65-74 had a DB plan only, but in 2016, 57.6 percent of these families had a DC plan only. Defined Contribution Plan Participation Rates of Family Heads Overall, in 2016, 79.4 percent of defined contribution plan eligible family heads chose to participate in the plan (conversely, just over 20 percent of eligible family heads chose not to participate). This was up slightly from 78.7 percent in 2013 (Figure 3).12 A number of demographic differences have persisted over the six survey periods: the increased likelihood of plan participation with higher levels of family income (above $10,000), net worth, and educational attainment. 13 For example, in 2016, the participation rate was just 47.3 percent of family heads with annual family income of $10,000– $24,999, compared with 89.9 percent for those with annual family income of $100,000 or more.

Additionally, racial disparities existed; white family heads were more likely to participate when eligible than nonwhite family heads. In 2016, 83.5 percent of white family heads who were eligible participated compared with 70.6 percent for nonwhite family heads. In 2016, the likelihood of participating in a current employer plan when eligible increased with the age of the family head through age 64, before declining for ages 65 and above. This same pattern resulted in 2013, but in prior years the age of the family head did not have such a clear pattern for those ages 35-64, where the percentages were similar across age groups and in some cases families with younger heads had higher likelihoods of participation.

The full report is published in the March 13 Issue Brief, “Individual Account Retirement Plans: An Analysis of the 2016 Survey of Consumer Finances,” and is available online here.

 

 

 

The Employee Benefit Research Institute is a private, nonpartisan, nonprofit research institute based in Washington, DC, that focuses on health, savings, retirement, and financial security issues. EBRI does not lobby and does not take policy positions. The work of EBRI is made possible by funding from its members and sponsors, which include a broad range of public, private, for-profit and nonprofit organizations. For more information go to www.ebri.org or visit the web site of EBRI’s affiliated American Savings Education Council at www.asec.org.