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CCH® PENSION AND BENEFITS — 6/6/08

Growth in 401(k)-type plans slows, EBRI study finds

The number of 401(k)-type plans and the number of participants in those plans, which had grown sharply through the 1990s, have grown at a slower pace in recent years, according to a study released by the Employee Benefit Research Institute (EBRI). The study uses the most recent data (2005) from the Survey of Income and Program Participation (SIPP), conducted by the U.S. Census Bureau.

The study indicated that the growth of IRA assets is due to rollovers from other tax-qualified retirement plans. Most new IRA contributions are going into Roth IRAs, which are nondeductible, but tax free on withdrawal.

“IRAs and defined contribution plans held $7.5 trillion in assets at the end of the year 2006,” writes Craig Copeland, EBRI senior research associate and author of the study. “Although Americans have amassed a substantial amount of total wealth in these plans, the data also show that a majority of Americans still do not have a retirement plan.”

Participation in 401(k)-type plans also slows

The study also found that the proportion of workers ages 21–64 participating in a 401(k)-type plan increased from 24.1 percent in 1996 to 33.1 percent in 2005. The percentage of workers ages 21–64 making a contribution to a 401(k)-type plan at the maximum dollar amount allowed by the Internal Revenue Service rose from 3.2 percent in 1996 to 8.9 percent in 2005. Other highlights from the study include:

• Number of 401(k)-type plans: The number of these plans in the private sector increased from 29,869 in 1985 to 436,207 in 2005. While the number of overall defined contribution plans (of which 401(k)-type plans are a subset) has also grown substantially, this number has leveled off and even declined slightly in recent years. The number of defined contribution plans was 207,748 in 1975, reached 686,878 by 2000, and declined to 631,481 in 2005.
• Active participants in 401(k)-type plans: The number of active participants in private-sector 401(k)-type plans increased from 10.3 million in 1985 to 44.4 million in 2004. The number of active participants in overall defined contribution plans increased from 11.2 million in 1975 to 52.9 million in 2002 and then leveled off to 52.2 million in 2004.
• Assets in 401(k)-type plans: Assets in these plans did not show the same trend as the number of plans and number of active participants from 1985–2004. Assets grew sharply, from $144 billion in 1985 to $1.79 trillion in 1999, before falling (along with the stock market) until 2002, reaching $1.57 trillion. The asset level subsequently increased, reaching $2.40 trillion in 2005.

Demographic factors influence 401(k) participation

Participation in 401(k)-type plans increased with the worker’s family income and educational attainment. Among workers with family incomes below $10,000, 7.4 percent participated, compared with 45.2 percent of workers with family incomes of $75,000 or more. Participation increased from 10.9 percent of workers without a high school diploma to 50.4 percent of workers with a graduate degree.

The likelihood of a worker participating in a 401(k)-type plan increased with age through age 55, where the likelihood declined for those ages 55–64. Males and females were equally likely to participate in a 401(k)-type plan. White workers were the most likely to be 401(k)-type plan participants: 36.8 percent of white workers were participants, compared with 31.8 percent of those of the next highest race/ ethnicity group (other).

Traditional IRAs have most assets, but Roth IRAs have more contributions

The proportion of eligible taxpayers who contributed to IRAs was near 10 percent for each year from 2000–2002, ranging from 9.5 percent to 10.6 percent. About 27 percent of IRA owners contributed the maximum amount allowed by law in 2005, less than half the rate of 1996, when the contribution limit was half as much as it was in 2005. The study further showed:

• Assets in IRAs: Of the $2.5 trillion in individual retirement accounts in 2002, $2.3 trillion was in traditional IRAs, representing more than 90 percent of all IRA assets. Roth IRAs amounted to $77.6 billion, and other IRAs held $133.4 billion in 2002.
• Contributions to IRAs: Of the $42.3 billion in IRA contributions in 2002, only $12.4 billion went to traditional IRAs, both deductible and nondeductible. This accounts for 29.3 percent of all IRA contributions. Roth contributions represented 31.2 percent of contributions, while the share of other IRA contributions was 39.5 percent.
• IRA ownership: Twenty-three percent of workers ages 21–64 owned an IRA at the end of 2005. This was an increase from 15.9 percent at the end of 1996. The percentage of workers ages 21–64 who owned either an IRA, a 401(k)-type plan, or both types of plans, increased from 34.1 percent in 1996 to 43.8 percent in 2005.
• IRA growth from rollovers: While IRAs have become the largest single vehicle of retirement assets in the United States, the growth continues to be due to rollovers from other tax-qualified retirement plans, and not from new contributions.

IRA ownership increases with age, income and education

Twenty-three percent of workers ages 21–64 owned an IRA at the end of 2005. This was an increase from 15.9 percent at the end of 1996. IRA ownership also increased with family income and age. Among workers with family income of $75,000 or more, 35.1 percent owned an IRA, whereas 8.3 percent of those with family income of $10,000– $19,999 owned an IRA. Three percent of workers ages 21–24 owned an IRA, compared with 33.9 percent of those ages 55–64.

IRA ownership also increased substantially with education, growing from 2.7 percent of workers without a high school diploma to 46.5 percent of those with a graduate degree. White workers were more likely to own an IRA than workers of other races/ethnicities. Male and female workers were virtually equally likely to own an IRA.