Data & Research September 18, 2018

ICI: IRAs Are Successful Vehicles for American Savers

Saving practices tend to vary based on the investor’s age.

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The Investment Company Institute (ICI) has issued two new reports on individual retirement accounts (IRAs) that show they remain successful vehicles for retirement savers. The reports, “The IRA Investor Profile: Traditional IRA Investors’ Activity, 2007 – 2016” and “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007 – 2016,” analyze data from The IRA Investor Database, which tracks more than 17 million IRA investors.

“Though there are significant differences between traditional and Roth IRA investors, both [types of accounts] provide savers with flexibility and diversification in their retirement savings options,” says Sarah Holden, ICI senior director of retirement and investor research. “Traditional IRAs are a popular option for savers who are looking to roll over a workplace retirement plan account, while Roth IRAs are often started with contributions. Both IRAs have options that appeal to workers in various stages of their lifetime savings cycle and help millions of Americans prepare for retirement.”

The reports show that Roth IRA investors tend to be younger than traditional IRA investors. At year-end 2016, 31% of the former were younger than 40, compared with 16% of the latter. Only 26% of Roth IRA investors were 60 or older, compared with 41% of traditional IRA investors.

New traditional IRAs are typically opened by rollovers, while Roth IRAs are more often started with contributions. More than 80% of new traditional IRAs in 2016 were opened exclusively with rollovers from other tax-deferred retirement savings vehicles, and more than half of traditional IRA investors with an account balance at year-end 2016 had rollovers in their account. By contrast, 70% of new Roth IRAs as of in 2016 were opened through contributions.

IRA investors who make contributions tend to maintain their contribution activity from year to year. More than 70% of traditional IRA investors who contributed in tax year 2015 also did so in 2016. The same can be said for 80% of Roth IRA investors.

Roth IRA assets are allocated more to equities and equity funds that are traditional IRAs. At year-end 2016, 65% of Roth IRA assets were invested in equities and equity funds, compared with 53% of traditional IRAs’ assets. For both types of accounts, allocation to target-date funds (TDFs) and balanced funds was similar: 19% to Roth IRAs and 18% to traditional IRAs. But it differed with respect to bonds and bond funds, with 7% of Roth IRAs having this exposure and 9% of traditional IRAs having it.

Withdrawal activity is much lower among Roth IRA investors than traditional IRA investors. In 2016, only 4% of Roth IRA investors ages 25 or older made withdrawals, compared with 24% of traditional IRA investors.

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Compliance September 18, 2018

‘Women’s Pension Protect Act’ Seeks DB-Like Protections for DC Plans

Democratic Senator Patty Murray says her bill would be a strong first step toward addressing some of the key hurdles facing women as they save for retirement in defined contribution plans; there are also proposed protections for part time workers and lower income individuals. 

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Senate Health, Education, Labor, and Pensions (HELP) Committee Ranking Member Patty Murray, D-Washington, has reintroduced legislation “to address some of the challenges families face as they plan for retirement,” especially women.

According to Senator Murray, the Women’s Pension Protection Act of 2018 (WPPA) includes a set of solutions to help strengthen women’s retirement security by addressing some of the challenges that disproportionately affect women as they plan for their financial futures.

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“The legislation would strengthen consumer protections to safeguard retirement savings, improve access to retirement savings plans for long-term, part-time workers, help increase women’s financial literacy, and give support to low-income women and survivors of domestic abuse seeking the retirement benefits they are entitled to following a divorce,” Murray says.

The legislation is divided into key sections, including an introduction highlighting the fact that approximately 29% of households headed by individuals aged 55 through 74 have no retirement savings and 34% of the private sector workforce lack access to a workplace retirement plan. Senator Murray further warns that women often lag significantly behind their male counterparts in preparing for retirement—as their median retirement income in 2014 was 54% of men’s retirement income.

To address these challenges, the Women’s Pension Protection Act would extend the spousal protections that are currently available for defined benefit (DB) plans to defined contribution (DC) plans. Specifically, this provision requires a spouse’s consent for certain distributions made from a defined contribution plan as well as any designation or change of beneficiary. The provision also explicitly outlines the rights of participants and beneficiaries to bring a civil suit for violations of these new requirements—rights which Murray says are currently available for participants and beneficiaries of defined benefit plans.

The bill would further amend the minimum participation standards for certain long-term part-time workers. This provision would “allow employees to participate in a plan once they have reached the current minimum participation standards (age 21 or the completion of one year of service defined generally as 1,000 hours of service during a 12-month period) or once they have completed at least 500 hours of service for two consecutive years, if earlier.”  This provision would not apply to employees that are covered by a collective bargaining agreement provided that retirement benefits were the subject of good faith bargaining.  The provision further provides that plans that fail to permit participation for these long-term, part-time workers may be subject to a civil penalty of $10,000 per year per employee.

The legislation would establish, “in any offer for the sale of a retirement financial product or service,” that financial providers “shall provide a link to the Consumer Financial Protection Bureau (CFPB) website where the consumer shall be able to access information and resources produced by the CFPB and/or other federal agencies relating to retirement planning or later life economic security.”

Additionally, there is a provision that provides the Secretary of Labor, acting through the Director of the Women’s Bureau, to award grants of at least $250,000 to “established community-based organizations on a competitive basis in order to improve the financial literacy of women who are of working or retirement age.” 

Finally, the Women’s Pension Protection Act provides the Secretary of Labor, again acting through the Director of the Women’s Bureau and in conjunction with the Assistant Secretary of the Employee Benefits Security Administration, to award grants of at least $250,000 to “established community-based organizations on a competitive basis to assist low-income women and victims of domestic violence in obtaining qualified domestic relations orders to ensure that these women actually obtain the benefits to which they are entitled through those orders.”

Read the full text of the bill here.

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