Retirement

Retirement

RETIREMENT FUNDS

Workplace plans play a major part in retirement savings, with 64 percent of Americans’ retirement assets held in private or public employer-sponsored plans in 2011, according to ICI. Almost one-third (27.2 percent) of such assets were in individual retirement accounts and 9.1 percent were in annuities.

Retirement plans are generally administered by a bank, life insurance company, mutual fund, brokerage firm or pension fund manager. Because payouts are relatively predictable, pension funds invest primarily in long-term securities. They are among the largest investors in the stock market. Pension plan assets made up 17.8 percent of total financial services industry assets in 2011.

 

U.S. RETIREMENT ASSETS, BY TYPE, 2002-2011

($ trillions, end of year)

(1) Data for 2003, 2009, 2010 and 2011 are estimates.

Source: Investment Company Institute.

 

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ASSETS OF PRIVATE PENSION FUNDS BY TYPE OF ASSET, 2007-2011 (1)

($ billions, end of year)

  2007 2008 2009 2010 2011
Total financial assets $6,410.6 $4,552.7 $5,471.0 $6,100.1 $6,070.3
Checkable deposits and currency 11.8 12.3 16.4 20.9 22.0
Time and savings deposits 67.7 67.9 72.7 72.8 73.3
Money market fund shares 93.5 95.7 96.4 96.3 96.1
Security repurchase agreements (2) 25.8 33.1 36.2 36.1 31.9
Credit market instruments 860.8 951.4 1,063.0 1,122.4 1,161.2
     Open market paper 26.9 37.2 26.7 18.2 16.7
     Treasury securities 169.5 184.9 310.7 391.0 436.2
          Agency- and GSE (3)-backed securities 296.8 318.1 269.1 257.6 252.4
     Corporate and foreign bonds 357.4 400.1 442.9 440.1 440.9
     Mortgages 10.2 11.1 13.6 15.5 15.0
Corporate equities 2,673.3 1,599.7 1,835.7 2,081.1 2,004.6
Mutual fund shares 2,110.6 1,366.0 1,817.3 2,121.1 2,144.6
Miscellaneous assets 567.1 426.5 533.3 549.4 536.8
     Unallocated insurance contracts (4) 431.3 317.6 412.8 457.5 450.8
     Contributions receivable 47.2 47.9 50.5 49.2 49.4
     Other 88.6 61.0 70.0 42.8 36.6
Pension fund reserves (liabilities) (5) 6,444.8 4,588.0 5,507.4 6,136.6 6,106.9

(1) Private defined benefit plans and defined contribution plans (including 401(k) type plans).
(2) Short-term agreements to sell and repurchase government securities by a specified date at a set price.
(3) Government-sponsored enterprise.
(4) Assets of private pension plans held at life insurance companies (e.g., variable annuities).
(5) Equal to the value of tangible and financial assets. These liabilities are assets of the household sector.

Source: Board of Governors of the Federal Reserve System, June 7, 2012.

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ASSETS OF STATE AND LOCAL GOVERNMENT EMPLOYEE RETIREMENT FUNDS BY TYPE OF ASSET, 2007-2011

($ billions, end of year)

  2007 2008 2009 2010 2011
Total financial assets $3,198.8 $2,324.5 $2,673.7 $2,931.5 $2,849.1
Checkable deposits and currency 17.9 17.8 17.7 17.3 18.4
Time and savings deposits 0.7 0.7 0.7 0.7 0.7
Money market fund shares 12.4 14.3 14.3 13.9 14.8
Security repurchase agreements (1) 21.7 23.5 23.5 22.8 24.3
Credit market instruments 820.3 833.5 824.7 816.5 834.8
     Open market paper 38.4 25.9 24.0 22.4 23.8
     U.S. government securities 472.7 483.9 481.4 470.8 479.2
         Treasury securities 141.6 146.4 174.5 185.6 188.9
          Agency- and GSE (2)-backed securities 331.1 337.5 306.9 285.2 290.3
     Municipal securities 2.4 1.4 1.5 1.6 1.5
     Corporate and foreign bonds 297.0 312.9 308.6 312.4 320.9
     Mortgages 9.7 9.4 9.3 9.4 9.3
Corporate equities 2,013.7 1,237.9 1,549.8 1,782.5 1,690.6
Mutual fund shares 296.4 181.1 226.7 260.8 247.3
Miscellaneous assets 15.7 15.7 16.2 17.0 18.1
Pension fund reserves (liabilities) (3) 3,297.9 2,414.7 2,759.8 3,024.0 2,967.9

(1) Short-term agreements to sell and repurchase government securities by a specified date at a set price.
(2) Government-sponsored enterprise.
(3) Equal to the value of tangible and financial assets. These liabilities are assets of the household sector.

Source: Board of Governors of the Federal Reserve System, June 7, 2012.

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TYPES OF RETIREMENT PLANS

There are two basic types of pension funds: defined benefit and defined contribution plans. In a defined benefit plan, the income the employee receives in retirement is guaranteed, based on predetermined benefits formulas. Typically, benefits are based on a percentage of the participant’s “terminal earnings,” i.e., earnings at retirement. In a defined contribution plan, a type of savings plan in which taxes on earnings are deferred until funds are withdrawn, the amount of retirement income depends on the contributions made and the earnings generated by the securities purchased. The employer generally matches the employee contribution up to a certain level and the employee selects investments from among the options the employer’s plan offers. 401(k) plans fall into this category, as do 403(b) plans for nonprofit organizations and 457 plans for government workers.

Other types of retirement funds include profit sharing plans, in which employers contribute to accounts based on their profits, and Keogh plans for the self-employed and employees of small businesses. Some workers who do not fall into these categories may make limited contributions to an individual retirement account (IRA). IRAs allow individuals to save money without paying taxes until they withdraw it. With the Roth IRA, a plan created in 1998 for individuals earning below specified income levels, individuals pay taxes on the money before it is saved and withdraw funds without paying federal taxes. Beginning in 2010 people with traditional IRAs were able to convert them to Roths. Roth 401(k)s were introduced in 2001 and made permanent by federal law in 2007.

There has been a dramatic shift away from defined benefit plans toward defined contribution plans over the past 20 years. As the number of employers offering defined benefit plans shrank, the percent of workers participating in such plans dropped from 35 percent in 1990 to 10 percent in 2010 and 2011. Defined contribution plan participation rose from 34 percent to 45 percent in 2010 but dropped back to 43 percent in 2011.

 

PARTICIPATION IN DEFINED BENEFIT AND DEFINED CONTRIBUTION PENSION PLANS, 1990-2011 (1)

(Percent)

Percent of all workers participating 1990-1991 2000 2005 2008 2009 2010 2011
Defined benefit plans 35% 19% 21% 20% 20% 10% 10%
Defined contribution plans 34 36 42 43 43 45 43

(1) All private industry.

Source: U.S. Bureau of Labor Statistics.

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RETIREMENT FUNDS ASSET MIX, 2013

Source: Board of Governors of the Federal Reserve System, June 5, 2014.

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  • In defined benefit plans, equities held the largest share by type of investment in 2013, with 40 percent, followed by credit market instruments, with 24 percent, and mutual funds, with 15 percent.
  • In defined contribution plans, mutual funds held the largest share, with 50 percent. Equities ranked second, with 26 percent, followed by other assets (such as guaranteed investment certificates) with 15 percent.

 

INVESTMENT MIX OF PRIVATE DEFINED BENEFIT PLAN ASSETS, 2007-2011

($ billions)

Year Equity Bonds Mutual funds Cash items Other assets Total assets
2007 $1,424 $587 $339 $56 $191 $2,596
2008 777 648 228 68 132 1,853
2009 805 767 286 70 177 2,105
2010 810 851 324 78 199 2,261
2011 703 898 330 94 199 2,223

Source: Securities Industry and Financial Markets Association.

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INVESTMENT MIX OF PRIVATE DEFINED CONTRIBUTION PLAN ASSETS, 2007-2011

($ billions)

Year Equity Bonds Mutual funds Cash items Other assets Total assets
2007 $1,250 $247 $1,772 $169 $376 $3,815
2008 823 266 1,138 178 294 2,699
2009 1,031 270 1,531 179 356 3,366
2010 1,202 306 1,803 175 350 3,836
2011 1,175 362 1,812 171 338 3,858

Source: Securities Industry and Financial Markets Association.

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IRA MARKET SHARES BY HOLDER, 2009 AND 2013

(Market value, end of year)

(1) Includes savings banks, commercial banks and Keogh accounts.
(2) Includes Keogh accounts.
(3) Excludes variable annuities.

Source: Board of Governors of the Federal Reserve System, June 5, 2014.

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ASSETS IN 401(k) PLANS, 2000-2009

($ billions, end of year)

Year  Mutual fund 401(k) plan assets (1) Other 401(k) plan assets Total
2000 $837 $887 $1,725
2001 799 883 1,682
2002 736 837 1,573
2003 923 999 1,922
2004 1,119 1,069 2,189
2005 1,242 1,154 2,396
2006 1,511 1,257 2,768
2007 1,702 1,280 2,982
2008 1,166 (2) 1,109 (2) 2,275 (2)
2009 1,515 (2) 1,238 (2) 2,754 (2)

(1) Preliminary data.
(2) Estimated by the Investment Company Institute.

Note: Components may not add to totals due to rounding.

Source: Investment Company Institute.

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AVERAGE ASSET ALLOCATION FOR ALL 401(K) PLAN BALANCES, 2012 (1)

(1) Percentages are dollar-weighted averages.

Source: Investment Company Institute, ICI Research Perspective, 19 no 12. www.ici.org.

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