On track with 401(k)
Individual retirement savings accounts (IRAs) have been helping US workers navigate the ups and downs of Wall Street since the 2008 financial crisis. IRAs and employer-sponsored defined contribution (DC) plans grew to $6.5trn and $5.9trn (€4.8trn and €4.3trn), respectively, at year-end 2013, up from $5.6trn and $5trn the previous year, according to data in the 2014 Investment Company Fact Book.
The fact book was recently released by Investment Company Institute (ICI), the national association of US investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs) and unit investment trusts (UITs).
US mutual fund assets reached $15trn for the first time in 2013, an increase of $2trn from 2012. Of all mutual fund assets, 43% were held in retirement accounts. On the other hand, mutual funds held in DC plans and IRAs accounted for 28% of the $23trn US retirement market at year-end 2013.
IRAs and employer-sponsored retirement plans – both private-sector and government employer plans, including defined benefit (DB) and DC plans – are two of the many resources that Americans have to prepare for retirement, says Sarah Holden, senior director of retirement and investor research at ICI.
IRAs and DC plans represent 54% of all retirement market assets, and the largest share of DC plans is made up of 401(k) plans, which had $4.2trn in assets at year-end 2013. “There has been a lot of innovation in these plans, designed to make it easier for workers to participate and stay the course with their investing,” Holden says. “Increasing numbers of plans automatically enroll new employees and offer target date funds [TDFs]”. TDFs follow a predetermined reallocation of assets to become more focused on income and less focused on growth over time, based on a specified target retirement date. At year-end 2012, they accounted for 15% of 401(k) assets, up from 5% at the end of 2006.
The impact of the 2008 financial crisis on retirement savings has not been as bad as was feared at first, according to ICI data. “When younger workers, people in their 20s, started contributing to 401(k) plans in 2008, in the middle of the turmoil, they were concerned, very nervous about the stock market,” says Holden. “Yet, the way 401(k) plans are designed helped these young workers keep investing, paycheque by paycheque. Also, thanks to TDFs, their portfolios have been more invested in equities than you would expect from their concerns.” In 2007, among 401(k) participants in their 20s, 19% had no equities and less than half had more than 80% of their accounts in equities. By end-2012, only 9% had no equities and 64% had more than 80% of their accounts in equities. “So, no matter the ups and downs of the markets, 401(k) kept workers on track,” concludes Holden.
In addition, the ICI Fact Book highlights that one trend in the US mutual fund industry is the substantial decrease in average expenses paid by investors. On an asset-weighted basis, average expense ratios for equity mutual funds fell from 99 basis points in 2000 to 74 basis points in 2013. Industry-wide mutual fund investors tend to concentrate their assets in lower-cost funds, and this tendency is even stronger for participants in 401(k) plans who invest in mutual funds; on an asset-weighted basis, the average total expense ratio incurred on their 401(k) holdings of equity mutual funds was 0.63% in 2012, less than the 0.77% for equity mutual funds industry-wide. Moreover, 35% of 401(k) equity mutual fund assets were in funds with total annual expense ratios of less than 0.50% of fund assets. It seems that transparency and competition in the US asset management industry work well for 401(k) plan participants.