Benefits May 22, 2014

Roth Growth Far Outpaces Traditional IRAs

May 22, 2014 (PLANSPONSOR.com) – Roth IRA balances grew at twice the rate of traditional individual retirement accounts (IRAs) between 2010 and 2012, according to a new analysis from the Employee Benefit Research Institute (EBRI).
Reported by

The analysis looks at the investment behaviors of Roth and traditional IRA owners, as tracked by the EBRI IRA Database, and finds the median asset increase for Roth owners was 16.6% between the start of 2010 and year-end 2012. Traditional IRA owners, on the other hand, saw assets grow just 7.9% during the same period.

A major factor in the different rates of increase, according to EBRI, was that new contributions made up a larger proportion of the Roth IRA balances due to the smaller average starting balances of Roth IRAs. Additionally, Roth owners were somewhat more consistent at making contributions each year, which had the impact of further magnifying Roth contributions over those made to traditional IRAs, EBRI explains.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

Researchers found that Roth IRA balances grew faster than traditional IRAs across each age group and for each gender. Looking at individuals who maintained an IRA account in the database throughout the three-year period, the overall average balance increased each year—from $95,431 in 2010 to $95,547 in 2011 and to $106,205 in 2012.

Interestingly, IRA owners whose balances originated as a rollover from another tax-qualified retirement plan also showed consistent growth, EBRI says, challenging the common assumption that IRAs founded with a rollover often fail to receive regular ongoing contributions (see “For IRAs, It’s All About the Rollover”). Only IRA owners age 70 and older—i.e., those who are legally required to start making withdrawals—saw balances decline from 2010 to 2012, EBRI says.

Craig Copeland, a senior research associate at EBRI and an author of the analysis, says EBRI’s IRA Database offers important insights for retirement planning professionals because it tracks IRA contributions longitudinally—not just as a snapshot in time. This allows for deeper insights into the behaviors of individuals in the sample, Copeland says.

For example, among traditional IRA owners, a snapshot analysis shows approximately 6% of IRA owners contributed to their IRA each year, but EBRI’s longitudinal data shows that over the three-year period approximately 10% of traditional IRA owners contributed in at least one year. Among Roth IRA owners, approximately 25% contributed in any one year, compared with 35% who contributed at some point over the three-year period.

“An annual snapshot of those contributing to IRAs doesn’t allow you to assess whether the same individuals were contributing on a regular basis, or if different people contributed in different years, whereas a consistent longitudinal sample of IRA owners does allow for this examination,” Copeland explains.

Other major findings from the EBRI IRA study include the following:

  • The overall average IRA account balance in 2012 was $81,660, while the average IRA individual balance (all accounts from the same person combined) was $105,001. Overall, the cumulative IRA average balance was 29% larger than the unique account balance, EBRI says.
  • Rollovers overwhelmingly outweighed new contributions in dollar terms. While almost 2.4 million accounts received contributions, compared with the 1.3 million accounts that received rollovers in 2012, EBRI says about 10 times as much was added to IRAs through rollovers, compared with contributions.
  • The average individual IRA balance increased with age for owners ages 25 or older, from $11,009 for those ages 25-29 to $192,961 for those ages 70 or older.
  • IRA owners were more likely to be male. In particular, those with an IRA originally opened by a rollover, or a SEP/SIMPLE IRA were more likely to be men. EBRI says men also had higher individual average and median balances than women. However, the likelihood of contributing to an IRA did not significantly differ by gender within the database.
  • Younger Roth IRA owners were much more likely to contribute to the Roth IRA than were older Roth IRA owners, with 43% of Roth owners ages 25 to 29 contributing to their Roth in 2012, compared with 21% of Roth owners ages 60 to 64.

The full report, “Individual Retirement Account Balances, Contributions, and Rollovers, 2012; With Longitudinal Results 2010–2012: The EBRI IRA Database,” is published in the May 2014 EBRI Issue Brief and is available online at www.ebri.org.

Compliance May 22, 2014

Plan Design Changes May Especially Benefit Women

May 22, 2014 (PLANSPONSOR.com) – Witnesses for a hearing about women’s retirement security advocated for Social Security improvements, expanded retirement plan access, and plan design changes.
Reported by

Those giving testimony for the Joint Committee on Taxation’s hearing noted that women generally have lower incomes than men, and due to caregiving responsibilities, women are more likely to step out of the work force for a time or work part-time. In addition, the decrease in the number of people getting married, and the likelihood married women will outlive their husbands, will affect the Social Security benefits of women (see “Addressing the Retirement Security Risks of Women”).

“The private retirement system which includes employer–sponsored plans needs to be extended so that those without access to a workplace plan will have the opportunity to save. These opportunities need to be extended to part-time and temporary workers,” M. Cindy Hounsell, JD, president of the Women’s Institute for a Secure Retirement, said. “Recognizing the difference in men’s and women’s work experience as well as their longevity indicates the need for financially innovative products, and increased financial education and planning to improve the financial security of older women and men.”

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

Hearing witnesses recommended automatic features in employer-sponsored plans, and automatic savings options for those without access to a plan, can especially help women who tend to have lower incomes since those with lower incomes are less likely to opt in to a savings plan.

Debra B. Whitman, executive vice president of Policy, Strategy and International Affairs at AARP, noted that the movement from a mostly defined benefit (DB) retirement plan landscape to mostly defined contribution (DC) plans has important implications for retirement security for all, but two consequences of the shift particularly for women, are the loss of automatic life annuities through employer-based plans and the loss of spousal consent for the type of distribution being made from these plans.

She said AARP believes more DC plan sponsors should offer fixed life annuities as a distribution option, adding, “Doing so will give women additional protection against outliving their retirement assets and old-age poverty.” (See “Guarantee It.”) In addition, she contended adding spousal consent requirements could increase the proportion of workers taking distributions in the form of annuities, further enhancing women’s retirement security.

Whitman explained that in the case of a married couple, defined benefit plans must pay benefits as a life annuity with survivor benefits for the spouse (i.e., joint and survivor annuity) unless the spouse consents to waive the survivor benefit.

Brigitte Madrian, Aetna Professor of Public Policy and Corporate Management at Harvard Kennedy School, agreed with these suggestions, and added that knowing how to draw down savings is key for women (see “Pre-Retirees Need Strategies for Withdrawing DC Assets”). “My biggest concern for women is what happens in retirement. Women have longer life expectancies than men, and married women tend to be several years younger than their husbands, so that the average married woman reaching retirement can expect to spend several years as a widow, and the average single women reaching retirement will spend all of her retirement years [single]. In the shift away from defined benefit and toward defined contribution retirement plans, the financial security of women in retirement will depend very much on how the wealth accumulated for retirement is managed,” she said.

Concerning Social Security, Whitman said because older women have fewer sources of other retirement income, they are more dependent on Social Security benefits. She cited research that shows Social Security is currently the principal source of family income for 53% of older women, and nearly the only source (90% or more) of family income for about one in four women, compared to about one in five older men. In addition, she noted, Social Security benefits replace a higher portion of preretirement earnings for low earners than high earners. “Because women are more likely to be lower lifetime earners than men—either because of low wages or limited work histories or both—Social Security benefit’s progressivity is a key component to keeping women out of poverty,” she said. “AARP believes that the current shortfall should be addressed sooner rather than later, so that the program’s fundamental structure and the protections it offers to almost all workers and their families can be protected.”

Whitman warned that reducing Social Security’s cost-of-living adjustment, on which older women are so dependent because of their longer life expectancy, should not be the solution to addressing the administration’s reported shortfall as it will cause women to fall further behind, and push many into poverty.

Hounsell also recommended changes to Social Security to help caregivers, including a specified earnings credit that would provide caregivers a set amount of earnings for a set number of years in which there was a child or parent in care and the caregiver’s actual earning was zero or greatly reduced from previous years, or a modification to the traditional Social Security benefit formula for workers who take time out of the work force by dropping out a set number of caring years from the highest 35 years required to determine the benefit.

Links to the archived webcast of the hearing and witness testimony are here.

«