GuidePost - Vol. 3, Issue 8 2007

The GRABot BAG
by Sherrie E. Grabot, CEO

December 2007
IRAs Get Their Share – and Then Some
This month’s edition of GuidePost is more of a stocking-stuffer than a big box under the tree. We want you to get back into the spirit of the season as soon as possible (the last-minute tax-planning season, that is). But we did notice that this year the 401(k) plan’s older sibling, the IRA, has once again received the most presents, and we have some thoughts to share on the subject.

Rollovers Are Reshaping Retirement
According to a recent study by the Employee Benefit Research Institute (EBRI), assets in IRAs grew by an astonishing 16.5% in 2006, to a record level of $4.23 trillion. Compared to $3.27 trillion for private-sector DC plans and $2.26 trillion for DB pension assets, this makes IRAs the nation’s leading vehicle for retirement assets – for the sixth year running. And this is despite all the employer matches, enrollment campaigns, and glossy brochures the 401(k) industry can muster.

Apart from appreciation of existing assets, EBRI found the main source of growth to be rollovers from employer-sponsored plans, while new contributions “pale in comparison.” That’s nothing new. On the 401(k) side we regularly wring our hands about low contribution rates, and I wonder if they’re any better on the other side of the fence.

Their own money
It would be interesting to see some other comparisons between the two account types as well. Are investment returns higher or lower? Do investors adjust their portfolios more often? Which is to say, do people tend to make smarter investment decisions with what they might feel is more “their own” money?

It’s all their own money, of course. But in an employer-sponsored plan, the sponsor provides important advantages – communication, education, fiduciary oversight, not to mention value-add services such as advice. IRA holders don’t get that, or at least don’t get nearly as much. They’re on their own.

Keep on rolling
When you consider that the $200 billion or so of annual rollover money that boosts IRA totals (again, data from EBRI) is coming out of sponsored plans, this is not exactly good news. After all, that’s more than 6% of total 401(k) assets, which in an average year cancels out well over half the appreciation in those plans.

The rollover volume will probably increase over time as well, as the long-term trend toward a more mobile labor force continues and workers change employers more often. That’s not the end of the world – in fact, it’s one reason 401(k)s were created in the first place. But it does leave retirement investors without the benefits of employer sponsorship, and beyond the range of improvements such as the Pension Protection Act.

It seems as if our efforts to help workers prepare for their financial futures are always a few steps behind real behavior. I’m sure IRAs won’t be the last word in retirement investing, either. The only thing you can really predict is that the future will be unpredictable. That, and that we’ll keep trying to catch up with it.

Now go write a check to your IRA. Then have a very happy and prosperous New Year.

~~ Sherrie