IFA is Ahead of the Trends in Retirement Plans

by Tom Allen and Mark Hebner - Tuesday, 07 July, 2015

A recent article published on benefitspro.com summarized the recent trends in retirement asset size and location. Not surprisingly, more and more assets are being geared towards individual retirement accounts (IRAs) and defined contribution plans (401(k), etc.) as investors are having to rely more and more on themselves to plan for life after work. Further, more and more assets are being geared towards target-date funds (TDFs), which are investment strategies that automatically shift the overall asset allocation away from risky equities and towards more fixed income over time. Thus, investors can focus more on saving for retirement than having to become their own professional portfolio manager. We explain TDFs in more detail in this article. Let’s take a quick look at the numbers.

As the BenefitsPro article indicates, total retirement assets have grown to almost $25 trillion as of the end of 2014, making up almost 36% of household assets across the nation. This is double of what total retirement assets were in 2000, and $18 trillion more than what was reported in 2007. While the stock market has rewarded investors handsomely since the most recent financial crisis, more and more investors are starting to get the message that the Department of Labor and financial professionals around the world have been saying for quite some time, “you need to start saving more.”

In terms of where assets are mainly located, the pie chart below gives a visual representation of assets in terms of percentages.

Below is a bar chart showing overall assets per account type as of end of 2014.

As you can see, IRAs and defined contribution plans are dominating the retirement landscape. In fact, asset growth in public and private pensions has almost been completely flat over the last decade as it has become an increasingly rare retirement vehicle for investors.

Assets within IRAs and defined contribution plans have also been increasingly geared towards target-date retirement funds since their official approval in the Pension Protection Act of 2006 as a qualified default investment alternative (QDIA). As a quick reminder, before the rise of target-date retirement funds, the main default investment option for investors was cash or a stable value fund. In other words, for employees who signed up for their company’s retirement plan, they would be invested in a very safe asset if the employee did not elect a different alternative. As the industry has become increasingly aware of the inaction taken by most retirement plan participants, they have also began to realize that adequately taking investment risk early on in an investor’s working career led to the potential of having a sustainable cash flow in retirement.

In terms of hard numbers, target-date retirement funds have grown to almost $1 trillion. Within defined contribution plans, target-date retirement funds account for almost $500 billion of retirement assets, up from $437 billion at the end of 2013 and $128 billion at the end of 2007.

The most encouraging part of these figures is that Index Fund Advisors is well ahead in terms of being able to service businesses and individuals in their retirement efforts. As the trend continues in terms of investors having to rely on themselves for retirement, there will be increasing competition to provide value for those investors. IFA not only provides customized retirement solutions and 3(38) fiduciary services (all for a very competitive fee), we also provide a lineup of custom target-date retirement portfolios based on leading academic research in the field of finance. These portfolios can also be designed to include investor’s social preferences, whether it be faith-based or environmental. If you are interested in learning more about IFA’s Retirement Plan Services and how we can assist you with your retirement needs, you can find more information in our new Retirement Services section of this website or call 888-643-3133.