Mutual Funds Primarily Used for Retirement Savings

ICI research found 90% of households that owned mutual funds held shares inside workplace retirement plans, individual retirement accounts (IRAs), and other tax-deferred accounts.  

Among those households that made their first mutual fund purchase in 2000 or later, 68% did so inside an employer-sponsored plan. Among those households that made their first purchase before 1990, 56% did so inside an employer-sponsored plan.   

Although 69% of mutual fund investors owned funds outside of employer-sponsored retirement accounts, many were also saving for retirement. Fifty-two percent of mutual fund–owning households held funds in their IRAs – in many cases, due to rollovers from 401(k)s or other employer-sponsored retirement plans.   

At year-end 2009, mutual funds accounted for $4.1 trillion, or 25%, of the $16 trillion U.S. retirement market, according to ICI. The remaining $11.9 trillion of year-end 2009 retirement market assets were managed by pension funds, insurance companies, banks, and brokerage firms. The $4.1 trillion in mutual fund retirement assets represented 36% of all mutual fund assets at year-end 2009.   

Assets in defined contribution plans have grown more rapidly than assets in other types of employer-sponsored retirement plans over the past quarter century, increasing from 27% of employer plan assets in 1985 to 40% of assets at year-end 2009. At the end of 2009, employer-sponsored DC plans – including 401(k) plans, 403(b) plans, 457 plans, Keoghs, and other DC plans – held an estimated $4.1 trillion in assets. With $2.8 trillion in assets at year-end 2009, 401(k) plans held the largest share of employer-sponsored DC plan assets.   

Two other plan types – 403(b) plans and 457 plans – held another $851 billion in assets. The remaining $483 billion in DC plan assets were held by other DC plans without 401(k) features.  

At the end of 2009, $1.5 trillion of 401(k) plan assets were invested in mutual funds. Mutual funds’ share of the 401(k) market increased to an estimated 55% at year-end 2009, up from 51% at year-end 2008, but still below the 57% share reached in 2007.  

Retirement is not the only financial goal for households’ mutual fund investments. Forty-nine percent of mutual fund–owning households reported that reducing their taxable income was one of their goals; 46% listed saving for an emergency as a goal; and 26% reported saving for education among their goals.

How Retirement Savers Are Investing  

Retirement savings accounts were a significant portion of long-term mutual fund assets (47%), but were a relatively minor share of money market fund assets (12%). Similarly, as a share of households’ mutual fund holdings, retirement savings represented 50% of households’ long-term mutual funds, but only 18% of households’ money market funds, according to the 2010 Investment Company Fact Book released by the Investment Company Institute (ICI).  

Of the $4.1 trillion in mutual fund retirement assets held in IRAs, 401(k) plans, and other retirement accounts at year-end 2009, $2.3 trillion, or 58%, were invested in domestic or foreign equity funds. Domestic equity funds alone constituted about $1.8 trillion, or 44%, of mutual fund retirement assets. By comparison, about 45% of overall fund industry assets—including retirement and nonretirement accounts—were invested in domestic and foreign equity funds at year-end 2009.   

At year-end 2009, $1 trillion, or about 25%, of mutual fund retirement assets were invested in fixed-income funds (bond or money market funds). Bond funds held $606 billion, or 15%, of mutual fund retirement assets, and money market funds accounted for $394 billion, or 10%. The remaining $709 billion, or approximately 17%, of mutual fund retirement assets were held in hybrid funds.  

Assets in lifestyle and lifecycle mutual funds totaled $511 billion at the end of 2009, up from $336 billion at year-end 2008. Lifestyle mutual funds’ assets were up 45% in 2009, rising from $176 billion to $255 billion. Assets of lifecycle funds were up 60% in 2009, increasing from $160 billion to $256 billion. The bulk (84%) of lifecycle mutual fund assets were held in retirement accounts, compared with 45% of lifestyle mutual fund assets.  

Assets in 529 college savings plans increased 24% in the first three quarters of 2009, with $111.1 billion in assets at the end of the third quarter of 2009, up from $89.4 billion at year-end 2008. As of September 30, 2009, there were 9.4 million accounts.  

The 2010 Investment Company Fact Book is here.