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RETIREMENT ASSETS |
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RETIREMENT FUNDS
Life spans in the United States have been increasing for over a hundred years. It is now common for people who reach retirement age to live 20 years or more in retirement, most of those years in good health. The U.S. Census predicts that by 2030 close to 1 out of 5 Americans—some 72 million people—will be 65 years or older, twice as as many as in 2006. These trends have helped fuel rapid growth in the assets that Americans accumulate for retirement. U.S. retirement assets increased by 6.7 percent from 2006 to $17.6 billion in 2007. These assets accounted for nearly 40 percent of U.S. household financial assets by the third quarter of 2007, compared with 24 percent twenty years ago, according to the Investment Company Institute. About one-quarter (26.7 percent) of such assets were in individual retirement accounts and a similar amount (25.6 percent) were invested in defined contribution plans. The remaining assets (47.7 percent) were annuities held outside of IRAs and other funds, defined benefit plans and federal, state and local pension plans.
Retirement plans are generally administered by a bank, life insurance company, mutual fund, brokerage firm or pension fund manager. Because payouts are relatively predictable, pension funds invest primarily in long-term securities. They are among the largest investors in the stock market. Pension plan assets made up 17 percent of total financial services assets in 2006.
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U.S. RETIREMENT ASSETS, BY TYPE, 1985-2007
($ trillions, end of year)
(1) Defined contribution plans include private employer-sponsored defined contribution plans (including 401(k) plans), 403(b) plans, and 457 plans.
(2) Other plans include: all fixed and variable annuity reserves at life insurance companies less annuities held by IRAs, 403(b) plans, 457 plans, and private pension funds; private-sector defined benefit plans; and federal, state, and local pension plans. Federal pension plans include U.S. Treasury security holdings of the civil service retirement and disability fund, the military retirement fund, the judicial retirement funds, the Railroad Retirement Board, and the foreign service retirement and disability fund. These plans also include securities held in the National Railroad Retirement Investment Trust and Federal Employees Retirement System (FERS) Thrift Savings Plan (TSP).
Source: Investment Company Institute.
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ASSETS OF PRIVATE PENSION FUNDS BY TYPE OF ASSET, 2003-2007 (1)
($ billions, end of year)
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2003 |
2004 |
2005 |
2006 |
2007 |
| Total financial assets | $4,520.1 | $4,915.2 | $5,295.6 | $5,679.4 | $5,821 |
| Checkable deposits and currency | 10.3 | 10.5 | 10.8 | 11.2 | 11.8 |
| Time and savings deposits | 60.4 | 55.8 | 62.0 | 63.1 | 65.9 |
| Money market fund shares | 84.3 | 84.9 | 86.7 | 90.1 | 94.1 |
| Security repurchase agreements (2) | 20.5 | 26.5 | 28.2 | 31.5 | 43.7 |
| Credit market instruments | 646.5 | 646.1 | 690.6 | 704.6 | 738.2 |
| Open market paper | 26.0 | 26.4 | 28.5 | 31.6 | 28.0 |
| U.S. government securities | 335.3 | 342.6 | 364.2 | 366.5 | 386.9 |
| Treasury securities | 113.9 | 109.8 | 112.8 | 116.4 | 121.2 |
| Agency- and GSE (3)-backed securities | 221.4 | 232.8 | 251.4 | 250.1 | 265.7 |
| Corporate and foreign bonds | 274.8 | 267.1 | 288.1 | 297.0 | 313.6 |
| Mortgages | 10.2 | 10.0 | 9.8 | 9.5 | 9.7 |
| Corporate equities | 2,096.6 | 2,333.5 | 2,537.0 | 2,755.3 | 2,766.3 |
| Mutual fund shares | 1,126.9 | 1,278.2 | 1,399.0 | 1,528.6 | 1,611.1 |
| Miscellaneous assets | 474.8 | 479.6 | 481.3 | 495.1 | 489.8 |
| Unallocated insurance contracts (4) | 317.0 | 328.4 | 338.4 | 363.9 | 355.3 |
| Contributions receivable | 49.8 | 46.6 | 44.8 | 42.8 | 49.8 |
| Other | 108.0 | 104.5 | 98.2 | 88.4 | 84.7 |
| Pension fund reserves (liabilities) (5) | 4,561.6 | 4,955.8 | 5,334.8 | 5,717.1 | 5,855.2 |
(1) Private defined benefit plans and defined contribution plans {including 401(k) type plans}.
(2) Short-term agreements to sell and repurchase government securities by a specified date at a set price.
(3) Government-sponsored enterprise.
(4) Assets of private pension plans held at life insurance companies (e.g., variable annuities).
(5) Equal to the value of tangible and financial assets. These liabilities are assets of the household sector.
Source: Board of Governors of the Federal Reserve System, June 5, 2008. |
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ASSETS OF PRIVATE PENSION FUNDS, 1945-2007
($ billions, end of year)
Source: Board of Governors of the Federal Reserve System, June 5, 2008.
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ASSETS OF STATE AND LOCAL GOVERNMENT EMPLOYEE RETIREMENT FUNDS
BY TYPE OF ASSET, 2003-2007
($ billions, end of year)
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2003 |
2004 |
2005 |
2006 |
2007 |
| Total financial assets | $2,349.2 | $2,577.5 | $2,721.4 | $3,049.6 | $3,157.1 |
| Checkable deposits and currency | 13.7 | 16.3 | 15.8 | 13.3 | 15.6 |
| Time and savings deposits | 0.8 | 1.4 | 1.3 | 0.8 | 1.0 |
| Money market fund shares | 13.4 | 11.6 | 11.7 | 13.0 | 15.3 |
| Security repurchase agreements (1) | 23.4 | 20.2 | 19.7 | 22.6 | 26.7 |
| Credit market instruments | 657.5 | 675.3 | 693.4 | 769.7 | 799.8 |
| Open market paper | 41.6 | 35.2 | 35.2 | 40.1 | 47.4 |
| U.S. government securities | 383.7 | 409.8 | 412.2 | 448.1 | 481.7 |
| Treasury | 148.6 | 151.0 | 153.8 | 153.0 | 164.5 |
| Agency- and GSE (2)-backed securities | 235.1 | 258.8 | 258.4 | 295.1 | 317.2 |
| Municipal securities | 4.4 | 1.8 | 1.7 | 1.7 | 0.9 |
| Corporate and foreign bonds | 207.4 | 213.5 | 227.9 | 265.6 | 257.5 |
| Mortgages | 20.4 | 15.1 | 16.4 | 14.1 | 12.4 |
| Corporate equities | 1,421.0 | 1,600.9 | 1,715.8 | 1,927.5 | 1,987.1 |
| Mutual fund shares | 207.9 | 235.9 | 248.4 | 287.7 | 296.6 |
| Miscellaneous assets | 11.3 | 15.9 | 15.4 | 15.1 | 15.0 |
| Pension fund reserves (liabilities) (3) | 2,399.1 | 2,625.6 | 2,765.2 | 3,086.9 | 3,185.7 |
(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 5, 2008. |
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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. Several other options have also been developed (see Appendix page __). 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.
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 Roth IRAs, 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 will be able to convert them to Roths. Roth 401(k)s were introduced in 2001 and made permanent by federal law in 2007. Unlike traditional 401(k) plans, Roth 401(k)s are funded with aftertax dollars.
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DEFINED BENEFIT AND DEFINED CONTRIBUTION PLANS, 1990-2006 (1)
(Percent)
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RETIREMENT FUNDS ASSET MIX, 2006
Source: Securities Industry and Financial Markets Association.
| - In defined benefit plans, the share of investments in equities rose from 61 percent in 2005 to 63 percent in 2006, while investments in bonds fell from 20 percent in 2005 to 19 percent in 2006.
- In defined contribution plans, the share of the investments in mutual funds rose from 37 percent in 2005 to 39 percent in 2006. Investments in other assets were essentially steady.
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DISTRIBUTION OF PRIVATE PENSION FUND ASSETS, 1985-2006
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INVESTMENT MIX OF PRIVATE DEFINED BENEFIT PLAN ASSETS, 2001-2006
($ billions)
Year |
Equity |
Bonds |
Mutual funds |
Cash items |
Other assets |
Total assets |
| 2001 | $1,061 | $401 | $181 | $60 | $107 | $1,810 |
| 2002 | 888 | 366 | 164 | 52 | 114 | 1,585 |
| 2003 | 1,156 | 440 | 197 | 55 | 131 | 1,380 |
| 2004 | 1,290 | 430 | 234 | 50 | 124 | 2,128 |
| 2005 | 1,313 | 431 | 233 | 58 | 114 | 2,149 |
| 2006 | 1,429 | 436 | 235 | 59 | 121 | 2,280 |
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Source: Securities Industry and Financial Markets Association. |
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INVESTMENT MIX OF PRIVATE DEFINED CONTRIBUTION PLAN ASSETS, 2001-2006
($ billions)
Year |
Equity |
Bonds |
Mutual funds |
Cash items |
Other assets |
Total assets |
| 2001 | $848 | $158 | $782 | $131 | $320 | $2,238 |
| 2002 | 671 | 182 | 668 | 148 | 294 | 1,963 |
| 2003 | 926 | 180 | 900 | 147 | 344 | 2,496 |
| 2004 | 1,039 | 190 | 1,059 | 154 | 356 | 2,797 |
| 2005 | 1,104 | 199 | 1,143 | 159 | 367 | 2,971 |
| 2006 | 1,239 | 227 | 1,272 | 164 | 378 | 3,279 |
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Source: Securities Industry and Financial Markets Association. |
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PENSION BENEFIT GUARANTY CORPORATION
The Pension Benefit Guaranty Corporation (PBGC), a federal corporation created by the Employee Retirement Income Security Act of 1974, protects the pensions of over 44 million workers in about 31,000 private defined benefit plans through two separate insurance programs: a single-employer plan termination insurance program and a multi-employer plan. In 2005 Congress passed landmark pension reform legislation to close shortfalls in employers’ funding of defined benefit pension plans. The act requires employers to fully fund their plans in seven years, but gives some airlines in bankruptcy proceedings an extra 10 years to meet their obligations. The law also removes legal barriers to the creation of some cash balance plans and is, together with a 2006 federal court ruling concerning IBM, expected to spur the growth of such plans. The August 2006 ruling held that IBM’s cash balance plan did not discriminate against older workers.
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PARTICIPANTS AND BENEFICIARIES RECEIVING
PENSION BENEFIT GUARANTY CORPORATION PAYMENTS, SINGLE-EMPLOYER PROGRAM, 1980-2005
(000)
Source: Pension Benefit Guaranty Corporation.
| - More than 80 percent of all claims against the PBGC have been recorded since 2000. Claims from the airlines and steel industries accounted for 75 percent of the claims received from 2000 to 2005.
- In 2005 the PBGC paid $3.7 billion in benefits to 698,000 defined benefit plan participants.
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IRA MARKET SHARES BY HOLDER, 2003-2007
($ billions, amounts outstanding, end of year)
By holder |
2003 |
2004 |
2005 |
2006 |
2007 |
| Commercial banking | $166.1 | $168.0 | $175.3 | $202.0 | $210.7 |
| Saving institutions | 54.8 | 53.7 | 53.8 | 57.6 | 71.2 |
| Credit unions | 46.8 | 47.7 | 49.3 | 53.2 | 58.2 |
| Life insurance companies | 338.4 | 347.0 | 381.0 | 406.0 | 435.0 |
| Money market mutual funds | 163.0 | 148.0 | 157.0 | 189.0 | 234.0 |
| Mutual funds | 1,093.0 | 1,277.0 | 1,433.0 | 1,698.0 | 1,907.0 |
| Other self-directed accounts | 1,130.9 | 1,257.7 | 1,402.6 | 1,614.2 | 1,830.9 |
| Total | $2,993.0 | $3,299.1 | $3,652.0 | $4,220.0 | $4,747.0 |
| Source: Board of Governors of the Federal Reserve System, June 5, 2008. |
| - In 2007 most IRAs were held by mutual funds, followed closely by “other self-directed accounts,” generally brokerage accounts in which the investor has considerable control over the direction of investments.
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IRA MARKET SHARES BY HOLDER, 2003 AND 2007
Source: Board of Governors of the Federal Reserve System, June 5, 2008.
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401(K) PLAN PARTICIPANTS
Fifty-five percent of those who participate in 401(k) plans are in their thirties or forties, according to an analysis by the Employee Benefits Research Institute and the Investment Company Institute. The median age of the participants in 2006 was 44 years, the same as in 2005. Thirty-three percent of the participants had five or fewer years of tenure in their firms, while 6 percent were at their firms for over 30 years. The median tenure at the current employer was eight years in 2006, the same as in 2005.
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401(K) PLAN PARTICIPANTS BY AGE, 2006 (1)
(1) Does not add to total due to rounding.
Source: Investment Company Institute.
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401(K) ASSETS
A new study by the National Bureau of Economic Research expects assets in 401(k) plans to grow dramatically in coming decades, even as aging baby boomers liquidate plan assets to fund their retirement. The plans, first introduced in the early 1980s, currently represent only a small portion of retirees’ wealth. However, in recent years the plans have become available to a majority of workers, with the percentage of families with members eligible to participate jumping from less than 20 percent in 1984 to more than 50 percent in 2003. By the time younger workers retire, they will have had more time to contribute to their plans than baby boomers, further fueling the growth of 401(k)s.
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ASSETS IN 401(K) PLANS, 1998-2007
($ billions, end of year)
Year |
Mutual fund
401(k) plan assets (1) |
Other 401(k)
plan assets |
Total |
| 1998 | $618 | $923 | $1,541 |
| 1999 | 812 | 978 | 1,790 |
| 2000 | 823 | 901 | 1,725 |
| 2001 | 799 | 883 | 1,682 |
| 2002 | 709 | 864 | 1,573 |
| 2003 | 923 | 999 | 1,922 |
| 2004 | 1,093 | 1,095 | 2,189 |
| 2005 | 1,242 | 1,154 | 2,396 |
| 2006 | 1,482 | 1,288 (2) | 2,770 (2) |
| 2007 | 1,674 | 1,372 (2) | 3,047 (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, 2006 (1)
(1) Percentages are dollar weighted averages. Does not add to total due to rounding.
Source: Investment Company Institute.
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