Retirement
 |
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 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 7 percent from $16.5 trillion in 2006 to $17.6 trillion in 2007. These assets accounted for nearly 40 percent of U.S. household financial assets, compared with 25 percent twenty years ago, according to the Investment Company Institute. Nearly two-thirds of retirement assets (63.8 percent) were in an employer-sponsored retirement plan (including government and private plans). About one-quarter (26.6 percent) of such assets were in individual retirement accounts and 9.6 percent were in annuities.
Retirement plans are generally administered by a bank, life insurance company, mutual fund, brokerage firm or pension fund manager. Because payouts are relatively predictable, pension funds invest primarily in long-term securities. They are among the largest investors in the stock market. Pension plan assets made up 16.8 percent of total financial services assets in 2007.
| |
|
U.S. RETIREMENT ASSETS, BY TYPE, 1998-2007
($ trillions, end of year)
(1) Data for 2003, 2005, 2006 and 2007 are estimates.
Source: Investment Company Institute.
| |
|
ASSETS OF PRIVATE PENSION FUNDS BY TYPE OF ASSET, 2003-2007 (1)
($ billions, end of year)
|
2003 |
2004 |
2005 |
2006 |
2007 |
| Total financial assets | $4,520.1 | $4,915.2 | $5,295.6 | $5,679.4 | $5,821.0 |
| Checkable deposits and currency | 10.3 | 10.5 | 10.8 | 11.2 | 11.8 |
| Time and savings deposits | 60.4 | 55.8 | 62.0 | 63.1 | 65.9 |
| Money market fund shares | 84.3 | 84.9 | 86.7 | 90.1 | 94.1 |
| Security repurchase agreements (2) | 20.5 | 26.5 | 28.2 | 31.5 | 43.7 |
| Credit market instruments | 646.5 | 646.1 | 690.6 | 704.6 | 738.2 |
| Open market paper | 26.0 | 26.4 | 28.5 | 31.6 | 28.0 |
| U.S. government securities | 335.3 | 342.6 | 364.2 | 366.5 | 386.9 |
| Treasury securities | 113.9 | 109.8 | 112.8 | 116.4 | 121.2 |
| Agency- and GSE (3)-backed securities | 221.4 | 232.8 | 251.4 | 250.1 | 265.7 |
| Corporate and foreign bonds | 274.8 | 267.1 | 288.1 | 297.0 | 313.6 |
| Mortgages | 10.2 | 10.0 | 9.8 | 9.5 | 9.7 |
| Corporate equities | 2,096.6 | 2,333.5 | 2,537.0 | 2,755.3 | 2,766.3 |
| Mutual fund shares | 1,126.9 | 1,278.2 | 1,399.0 | 1,528.6 | 1,611.1 |
| Miscellaneous assets | 474.8 | 479.6 | 481.3 | 495.1 | 489.8 |
| Unallocated insurance contracts (4) | 317.0 | 328.4 | 338.4 | 363.9 | 355.3 |
| Contributions receivable | 49.8 | 46.6 | 44.8 | 42.8 | 49.8 |
| Other | 108.0 | 104.5 | 98.2 | 88.4 | 84.7 |
| Pension fund reserves (liabilities) (5) | 4,561.6 | 4,955.8 | 5,334.8 | 5,717.1 | 5,855.2 |
(1) Private defined benefit plans and defined contribution plans (including 401(k) type plans).
(2) Short-term agreements to sell and repurchase government securities by a specified date at a set price.
(3) Government-sponsored enterprise.
(4) Assets of private pension plans held at life insurance companies (e.g., variable annuities).
(5) Equal to the value of tangible and financial assets. These liabilities are assets of the household sector.
Source: Board of Governors of the Federal Reserve System, June 5, 2008. |
| |
|
ASSETS OF STATE AND LOCAL GOVERNMENT EMPLOYEE RETIREMENT FUNDS
BY TYPE OF ASSET, 2003-2007
($ billions, end of year)
|
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. |
| |
|
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.
| |
|
PARTICIPATION IN DEFINED BENEFIT AND DEFINED CONTRIBUTION PLANS, 1990-2006 (1)
(Percent)
| |
|
RETIREMENT FUNDS ASSET MIX, 2007
Source: Securities Industry and Financial Markets Association.
| - In defined benefit plans, the share of investments in equities fell from 63 percent in 2006 to 62 percent in 2007, while investments in bonds rose from 19 percent in 2006 to 21 percent in 2007.
- In defined contribution plans, the share of the investments in mutual funds rose from 39 percent in 2006 to 40 percent in 2007. Investments in equities fell from 38 percent to 37 percent in 2007 and investments in other assets held steady.
| |
|
INVESTMENT MIX OF PRIVATE DEFINED BENEFIT PLAN ASSETS, 2003-2007
($ billions)
Year |
Equity |
Bonds |
Mutual funds |
Cash items |
Other assets |
Total assets |
| 2003 | $1,171 | $459 | $197 | $55 | $131 | $2,013 |
| 2004 | 1,294 | 449 | 234 | 50 | 124 | 2,151 |
| 2005 | 1,393 | 482 | 253 | 58 | 114 | 2,300 |
| 2006 | 1,429 | 436 | 246 | 59 | 121 | 2,388 |
| 2007 | 1,471 | 485 | 226 | 58 | 112 | 2,353 |
| Source: Securities Industry and Financial Markets Association. |
| |
|
INVESTMENT MIX OF PRIVATE DEFINED CONTRIBUTION PLAN ASSETS, 2003-2007
($ billions)
Year |
Equity |
Bonds |
Mutual funds |
Cash items |
Other assets |
Total assets |
| 2003 | $926 | $184 | $929 | $147 | $344 | $2,529 |
| 2004 | 1,039 | 193 | 1,045 | 154 | 356 | 2,787 |
| 2005 | 1,144 | 202 | 1,146 | 159 | 367 | 3,018 |
| 2006 | 1,265 | 224 | 1,282 | 169 | 374 | 3,314 |
| 2007 | 1,296 | 244 | 1,385 | 187 | 378 | 3,489 |
| Source: Securities Industry and Financial Markets Association. |
| |
|
IRA MARKET SHARES BY HOLDER, 2003-2007
($ 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 | $4,747.0 |
| Source: Board of Governors of the Federal Reserve System, June 5, 2008. |
| - In 2007 most IRAs were held by mutual funds, followed closely by “other self-directed accounts,” generally brokerage accounts in which the investor has considerable control over the direction of investments.
| |
|
IRA MARKET SHARES BY HOLDER, 2003 AND 2007
Source: Board of Governors of the Federal Reserve System, June 5, 2008.
| |
|
ASSETS IN 401(k) PLANS, 1998-2007
($ 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. |
| |
|
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.
| |
| |
|
