The Department of the Treasury and the Internal Revenue Service released new guidance that is “designed to expand the use of income annuities in 401(k) plans.”
By Cyril Tuohy
Despite last year’s hard-hitting news headlines about the shortcomings of the defined contribution system, investors say they are committed to retirement savings through the employer-based plans as a way to prepare for retirement.
The findings, contained in the latest study on defined contribution investor behavior in the first three months of 2013, are published by the Investment Company Institute, a mutual fund trade group. The data in the study comes from record-keepers of more than 24 million defined contribution plan participant accounts.
Only 2.5 percent of defined contribution participants stopped contributing in the first three quarters of 2013, compared with 2.1 percent during the first three quarters of 2012, and 2.2 percent for the first three quarters of 2011, the study found.
This survey didn’t say how much investors were setting aside in their defined contribution accounts. Separate research about 401(k) investment habits has found that most workers don’t set aside enough. Advisors recommend putting away 12 to 15 percent of every paycheck.
Only 3 percent of participants withdrew funds in the first three quarters of last year, and levels of hardship withdrawals also remained low with only 1.4 percent of defined contribution plan participants taking them, the ICI survey also found.
Financial advisors discourage investors from withdrawing funds early because of the heavy tax penalties associated with taking money out early.
At the end of September, 18.3 percent of defined contribution plan participants had loans outstanding, compared with 18.2 percent at the end of 2012 and 15.3 percent at the end of 2008, the survey also found.
Most plan participants stayed with their asset allocations as the Standard & Poor’s 500 index delivered strong returns. Only 9.2 percent of participants changed their allocations within account balances during the first three months, and 6.8 percent changed the asset allocation of their contributions, the study found.
Changing the asset allocation of the contribution means investors placing 10 percent of the contribution in a growth fund would now be redirecting 5 percent of the contribution to a growth fund and the other 5 percent to a value fund.
The total amount of the contribution – 10 percent – has not changed, only how that 10 percent is allocated.
In a booming market, with account balances on the rise, investors are content to let their plans run on autopilot.
The stay-the-course strategy suggests that investors are happy with defined contribution opportunities and aren’t worried about high fees and opaqueness surrounding many 401(k) statements.
Critics said 401(k)s had short-changed investors compared to defined benefit plans. The limitations of do-it-yourself investing were brought home by the 2008 recession when millions of investors saw their wealth evaporate by the tens of billions of dollars.
Assets in defined contribution plans represent 25 percent of all assets in the retirement market. At the end of the third quarter, total U.S. retirement assets stood at $21.9 trillion, compared with $19.9 trillion in retirement assets at the end of 2012.
The largest portion of retirement assets are held in Individual Retirement Accounts (IRAs), followed by federal, state and local pension plans; 401(k)s, private defined benefit plans, annuities, and other defined contribution plans like 403(b)s, 457 plans and other private employer-sponsored defined contribution plans, the ICI report said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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