Washington, D.C. – March 11, 2021 – A new study conducted by the Employee Benefit Research Institute examining individual account retirement plans found that balances grew modestly between 2016 and 2019, but their prevalence is much higher than they were in 1992. However, families with minority heads were much less likely to have IA retirement plans than other families, and when they did own these plans the median amount held in them was significantly less.
“The Status of American Families' Accumulations In Individual Account Retirement Plans, and Differences by Race/Ethnicity” is an analysis of the 2019 Survey of Consumer Finances, the Federal Reserve’s triennial survey of wealth, assessing the status of American families' accumulations in IA plans, both in terms of ownership and amounts accumulated. The study focuses on families with heads of different races and ethnicities and their relative holdings in these plans.
IA retirement plans include employment-based retirement savings plans financed by both employer and employee contributions--most notably, defined contribution (DC) plans such as 401(k) plans--as well as Keogh plans for the self-employed, and individual retirement accounts (IRAs), which are primarily for savings outside of the workplace.
DC Plans Reign, But All IA Plans Have Experienced Growth
In 2019, 66 percent of all families that had an active participant in an employment-based retirement plan from a current employer only had a DC plan -- up from 37.5 percent in 1992. Among these families with an active participant, a significant shift occurred from 1992 to 2019 -- the percentage having only a defined benefit pension plan decreased from 40 percent in 1992 to 15.8 percent in 2019. The percentage of families with both types of plans decreased from 22.5 percent in 1992 to 18.2 percent in 2019.
Meanwhile, the average account balance of those families owning IA plans increased from $79,262 in 1992 to $258,453 in 2019. Average balances were $247,289 in 2016.
“As DC plans have proliferated in the private sector, IA retirement plans have become the predominate source of financial assets for American families holding these plans. In fact, in 2019, IA constituted more than two-thirds of financial assets at the median for families owning IA plans,” said Craig Copeland, EBRI Senior Research Associate and author of the report. “Not only do IAs make up a large portion of families’ financial holdings, but those with IAs also have substantially higher levels of net worth than those families without them.”
The study also finds median net worth for families that owned IA assets was $284,050 in 2019, compared with $35,460 for families without IAs.
Of great concern, families with minority heads were much less likely to have IA retirement plans and when they did own these plans the median amount held in them was significantly less. Yet, the IA assets held by these families were a larger share of their total financial assets than families with white, non-Hispanic heads.
“Unfortunately, this gap between families with different races/ethnicities has persisted since at least 1992,” said Copeland. “As a result, families with minority heads are generally in a much worse position in their preparation for retirement in terms of IA retirement plan assets, and consequently have much less flexibility in financing retirement without these assets.”
In 2019, the likelihood of having a retirement plan was nearly twice as likely for families with white, non-Hispanic heads compared with families with Hispanic heads—71.1 percent vs. 37.4 percent. The study also found just over half (50.6 percent) of Black/African American heads owned a retirement plan. These disparities have been consistent back to 2007.
The largest gap exists with ownership of IRAs: In 2019, 6.6 percent of families with Hispanic heads and 9.3 percent of families with Black/African American heads had an IRA, which is one-fifth and just over one-fourth, respectively, of the ownership rate of families with white, non-Hispanic heads (32.4 percent). These discrepancies have held since at least 2007.
However, there is also a gap when it comes to the ownership of DC plans from a current or former employer: families with minority heads had ownership rates one-third to nearly one-half less than the families with white, non-Hispanic heads. In part, this gap is attributable to the fact that in 2019 only 31.8 percent of Hispanic working family heads were even eligible for a DC plan and 48.3 percent of Black/African American working family heads were eligible. In contrast, 59.6 percent of white, non-Hispanic working family heads were eligible. These disparities have held back to 2007, but have worsened in recent years.
Moreover, Black/African American and Hispanic working family heads are less likely to participate in a DC plan, even when eligible. In 2019, 81 percent of white, non-Hispanic working family heads participated in a DC plan when eligible, compared with 70.2 percent for Black/African American working family heads and 62.8 percent for Hispanic working family heads.
IAs Play Invaluable Role in Retirement Security
While this study's results do not answer questions about the level of IA assets needed for retirement, they show the continued importance of individual account retirement plans. Consequently, any policy that alters this system could have consequences–either positive or negative–for Americans’ ability to fund a comfortable retirement.
“The Status of American Families' Accumulations In Individual Account Retirement Plans, and Differences by Race/Ethnicity” is available at ebri.org.