Summary
• Importance of individual account retirement plans: Individual account retirement plans, such as 401(k) plans and individual retirement accounts (IRAs), have continued to increase their share of retirement assets. About $7.5 trillion in assets currently are held in IRAs and private-sector defined contribution plans such as 401(k)s. Since individual account plans have become the dominant type of retirement plan in the United States, tracking the participation and accumulations in these plans is an important indicator of how workers are preparing financially for retirement. This study uses the most recent data from the Survey of Income and Program Participation (SIPP) to examine the prevalence of these accounts among workers ages 21–64.
• Defined contribution plan growth has topped out: The most current data show that the sharp increase in the number of defined contribution plans and participants, which had grown sharply through the 1990s, had leveled off by 2004. The number of DC plans hit almost 687,000 in 2000, and was down to less than 636,000 in 2004. The number of DC participants reached 52.9 million in 2002 and was down to 52.2 million in 2004. (There are several types of DC retirement plans, which include the 401(k).)
• Ownership of IRAs or 401(k)-type plans has increased significantly: Just over 40 percent of workers ages 21–64 owned a 401(k)-type plan or an IRA in 2004, up from 34 percent in 1996.
• IRA contributions: In 2004, about 38 percent of IRA owners contributed the maximum amount allowed by law, almost half the rate in 1996. Most new IRA contributions are going to nondeductible Roth IRAs (generally tax-free at withdrawal), not traditional IRAs. The major source of IRA growth continues to be rollovers from other tax-qualified retirement plans, and not from new contributions. Contributions to individual account retirement plans are strongly influenced by demographic factors, chiefly income, education, and race.
• The challenge of making retirement money last: Although many workers have amassed a substantial amount of wealth in these plans, a majority of Americans still do not have a retirement plan. Not just accumulating but also managing these retirement assets is a new challenge for new and future retirees, unlike many older retirees whose working careers spanned the time when employer-financed defined benefit pension plans (with annuity payments) were the norm. Retirees using these individual account plans are being handed two difficult assignments—accumulation and orderly divesture—for financing a comfortable retirement.