Data & Research September 17, 2012

Retirement Income Market Is Shrinking

The annual snapshot of U.S. household finances from Hearts & Wallets reveals a prolonged negative impact on retirees as a result of low interest rates. 
Reported by

“Retirees are working longer and reducing income drawn from assets because of very low interest rates resulting from ongoing government policy and uncertain equity markets,” said Chris Brown, principal at the retirement and savings research firm. “These factors impact the retirement income market. We’ve revised our 2020 projections downward as a result.” 

Hearts & Wallets projects a retirement income market in 2020 of between 14% and 24% of all U.S. household investable assets, lower than the 20% to 30% projections made last year. 

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“With interest rates at unprecedented lows and political pressure to keep them low or lower further, some firms may want to change the definition of the retirement income market as assets being used to draw 4% or more of income to 3% or more,” said Laura Varas, Hearts & Wallets partner. 

The projection is based on the behavior of retirees without pensions. In 2012, 45% of nonpensioner assets are being drawn for income at 4% or more, down from the 50% to 60% rate in 2006 and 2008. 

Less affluent households, which seem to be generating virtually no income or taking unsustained income, may be more affected. Wealthier households are more successful at taking moderate income. For households with $100,000 to $250,000, 35% of assets generate virtually nothing, and 20% are withdrawing an unsustainable 9% or more in income. Only 21% of wealthier households generate almost no income, and very few take more than 7%. 

The Hearts & Wallets Portrait analysis is based primarily on publically available government sources, compared to the most recent Federal Reserve Survey of Consumer Finance (2007, completed in March 2008, released 2009; first reinterview ever in progress as of August 2011) and quarterly Flow of Funds. 

Total U.S. household investable assets grew from $30.2 trillion at year-end 2010 to $31.9 trillion with retirement assets up slightly from $10.7 trillion to $10.9 trillion and taxable assets up to $21.0 trillion from $19.5 trillion. Taxable asset growth, by seven-year compound annual growth rate (CAGR), outpaced retirement at 6.1% versus 4.8%. Overall U.S. households declined to 118 million, down about 2% from 120 million in 2010. A drop in younger households accounted for most of the overall decline, as younger individuals presumably moved back with parents or in with roommates. 

IRAs remained the largest of all categories of retirement assets at $4.9 trillion. Private defined contribution (DC) was steady at $3.9 trillion. In 2011, the seven-year CAGR of IRAs was 5.6%, outpacing all other retirement asset types, but the growth rate slowed from 2010 to 2011. 

For complete data from the Portrait study of U.S. household wealth, including investor target market by age and assets, contact Hearts & Wallets at http://www.heartsandwallets.com. 

Data & Research September 17, 2012

Study Finds Decrease in DC Plan Fees

 

The Investment Company Institute and Deloitte Consulting LLP have found total fees for defined contribution (DC) plans were lower in 2011 than in 2009.

 

Reported by

Totaling all administrative, recordkeeping and investment fees, the median participant-weighted “all-in” fee for plans in the 2011 Defined Contribution/401(K) Fee Study was 0.78%, or approximately $248 per participant. The data suggest that the participant at the 10th percentile was in a plan with an “all-in” fee of 0.28%, while the participant at the 90th percentile was in a plan with an “all-in” fee of 1.38%.  

The median participant “all-in” fee of 0.78% of assets in the 2011 Fee Study is lower than that observed in the 2009 Fee Study, which was 0.86% of assets. The companies said there are a number of factors that may contribute to the decline in the ‘all-in’ fee between the 2009 Fee Study and the 2011 study.   

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These factors include different samples of plan sponsors; a larger survey population (over four times as large); different asset allocations (some driven by market performance between the two years); and different fee structures within the industry. 

One reason for the lower median “all-in” fee in the 2011 Fee Study versus the 2009 Fee Study may also be related to the relationship between asset-based fees and non-asset-based fees. When plan asset information was collected in the 2009 survey, investment markets had just experienced the turmoil of the financial crisis of late 2008. Since that time, financial markets have rebounded and total plan assets have grown. As defined contribution plan assets grew, the non-asset-based fees would have been spread out over a larger asset base, causing them to fall as a percentage of assets.  

 

(Cont...)

Despite the differences, the study found the two primary drivers from the previous survey continued to be important factors in explaining the variation in fees across plans within the 2011 survey sample. Specifically, the study showed that plan size as measured by number of participants and average account balance were primary drivers of a plan’s “all-in” fee, which was also the case in the 2009 Fee Study.   

In addition to the two plan-size-related primary drivers, the 2011 Fee Study found that the percentage of a plan’s assets in equity investment options was also determined to be a primary driver of a plan’s “all-in”fee. This factor was identified as a secondary driver in the 2009 Fee Study.     

The 2011 study found investment fees make up a significant portion of total plan expenses—84% of the “all-in” fee for the study sample. Findings also showed that equity investment options have higher expense ratios than fixed-income or other asset classes. A regression analysis indicated that a 10 percentage point shift in plan assets into equity investment options is associated with an added 2.6 basis points to the “all-in” fee.   

The Fee Study report is here.

 

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