Retirement on course
Five years after the Lehman collapse, Americans’ retirement savings look like they have overcome the shock and are growing steadily. In fact they’ve reached the record amount of $20.8trn (€15.7trn) according to the latest data published by the Investment Company Institute (ICI), the national association of US investment companies.
Retirement savings accounted for 36% of all US household financial assets at the end of Q1 2013, although the ICI does not break down whether the asset growth is from contributions or investment gains.
“What we know is that from defined contribution (DC) plans and individual retirement accounts (IRAs) there are net inflows, while defined benefit (DB) plans have net outflows because benefits paid out exceed contributions,” explains Sarah Holden, senior director of Retirement and Investor Research at ICI.
IRAs held the largest amount of assets, $5.7trn, at the end of the first quarter of 2013, an increase of 5.1% over the quarter. They not only receive new contributions but also rollover money from other accounts when a person changes job.
The second largest trove of retirement savings is DC plans with $5.4trn (5.7% up over
the quarter), 57% of which are managed through mutual funds. Government pension plans held $5.2trn in assets (a 5.3% increase in the quarter). Private sector DB plans grew only 3.8% to $2.7trn, while annuity reserves outside of retirement accounts went up 5.5% to $1.9trn.
Target date mutual funds (TDFs) totalled $529bn, an increase of 10% in the first quarter of 2013, and 91% of their assets were held through DC plans and IRAs. According to Holden, who leads ICI’s research efforts on investor demographics and behaviour, TDFs have provided diversification and rebalancing and satisfy the needs of many employees.
“Some people want to select their own asset allocation, pick and choose each investment,” she observes. “Others prefer to have professionals handling diversification and rebalancing their accounts over time. So there is a demand from the public.”
An important feature of TDFs is that they follow a pre-determined strategy for reducing risk by adjusting asset allocations as the target date moves closer to the present, according to David Abbey, ICI senior counsel on pension regulation. He says that it appears target date mutual funds did what they were designed to do during the market-wide downturn in 2008 – following a consistent asset allocation strategy thereby allowing their shareholders to benefit from the subsequent market recovery. Abbey adds that sponsors of TDFs share a commitment to enhancing investors’ understanding of the risks and potential rewards of the products.
On disclosure, the new Department of Labor rules on fee transparency were strongly supported by the mutual fund industry, Abbey points out. “New rules regarding fee disclosure by service providers to plan sponsors have generally codified industry ‘best practices’ and made more uniform the information available to plan sponsors,“ he says.
“Because data show that the long-term trend has been for both recordkeeping fees and mutual fund investment costs to fall, it is difficult to show a clear causal connection between continuing cost declines and the more recent implementation of the new disclosure rules. One interesting aspect of the disclosure rules that tends to be overlooked is the requirement that the disclosure include a description of all services provided. This ensures that, beyond just fees, plan sponsors better understand the quality and quantity of what the fees pay for.”
If there is a cloud darkening an otherwise serene landscape for the retirement industry today it is the idea of drastically reducing tax incentives to contributions in order to improve the federal budget. “Penalising retirement savings would be a wrong move,” concludes Holden. “Those $20.8trn in retirement assets show the commitment of Americans to build their pensions, paycheck by paycheck, and stay the course.”