Americans were able to reliably grow their IRA balances during the past decade, but one watchdog is concerned about how they allocated assets in those accounts during the last bull market.
In a massive analysis of IRAs between 2013 and 2017, the Employee Benefit Research Institute found that the average account balance grew from $93,441 to $114,383 during that time, an increase of 22.4%.
But the bull market did not significantly impact Americans’ ability to contribute to their retirement accounts, according to the firm's issue brief entitled “EBRI IRA Database: IRA Balances, Contributions, Rollovers, Withdrawals and Asset Allocation, 2017 Update.” The increase in average annual IRA contributions grew by less than 1% in the same time period, from $3,880 in 2013 to $3,913 in 2017.
EBRI’s analysis uncovered some concerning results when it comes to IRA account owners’ asset allocation. Nearly a quarter of IRAs had what EBRI terms an “extreme allocation” away from equities, with 24.4% of accounts allocating 10% or less of assets to equities, and another 16.4% allocating 90% or more of their assets to fixed income and cash.
According to EBRI, many of these accounts with extreme allocations away from equities are a result of automatic rollovers from defined contribution plans like 401(k)s with balances of $1,000 to $5,000 that typically default to cash allocations. Previous EBRI research found that assets that are automatically rolled over tend to stay where they are initially allocated.
In 2017, the amount of assets rolled over to IRAs greatly outpaced the amount of money contributed to IRAs, according to EBRI. The mean average rollover to traditional IRAs totaled $94,879, with a median rollover of $14,454, while the average contribution to a traditional IRA was $4,163, significantly exceeding the average contribution across all types of IRAs.
Just 12% of all accounts in the EBRI database received a contribution in 2017, with Roth accounts more likely to receive a contribution than traditional IRAs.
Simultaneously, 21% of IRA owners took a withdrawal in 2017. Only 3% of Roth IRA owners took a distribution, compared with 25.6% of traditional IRA owners. EBRI’s analysis found that most of the overall IRA withdrawals were prompted by required minimum distributions (RMDs). Only one-in-four U.S. IRA owners ages 71 or older were found to have withdrawn amounts from their traditional IRAs in excess of their RMDs.
“This study demonstrates the power of defaults and signaling in influencing behavior in IRAs,” said Craig Copeland, senior research associate at EBRI and author of the report, in released comments. “The asset allocation in accounts with balances less than $5,000 seem to be largely driven by the default investment of forced cash outs. Furthermore, individuals who don’t know how much to withdraw from their IRA in many instances are simply defaulting to the RMD, assuming that is the ‘correct’ amount to withdraw.”
EBRI’s results are based on an analysis of the EBRI IRA Database, which collects data from IRA-plan administrators throughout the U.S. and contains usable data on 11.3 million accounts owned by 9.2 million individuals with total assets of $1.3 trillion.