New Report Shows Strong IRA Growth
By Mike Rahn, CISP
The Internal Revenue Code offers an array of tax-advantaged accounts in which individuals can accumulate financial resources for various needs after they leave the workforce. These include employer-sponsored retirement plans, IRAs, and—perhaps surprising to some—health savings accounts (HSAs), arrangements by which individuals can reimburse themselves for medical expenses not covered by a health insurance plan.
Cerulli Associates is a provider of reports, periodicals, and platform-based investment market intelligence in the areas of asset management, marketing assistance, and retirement research, as well as offering strategic consulting and custom research services. Their report, which must be purchased to access, is entitled U.S. Retirement Markets 2020. The report contains statistical information on the availability of tax-advantaged retirement saving opportunities, accumulations in such arrangements, attitudes of service providers within the retirement industry, etc. Data sources include the U.S. Census Bureau, Department of Labor, retirement plan sponsors and recordkeepers, the Investment Company Institute, and others.
Following are selected findings from this study. These findings are chiefly focused on IRAs and HSAs.
(Reproduction or re-use of this material without the express consent of Cerulli Associates is a violation of copyright, and is prohibited.)
How IRAs Rank in Overall Retirement Savings
The original—now called Traditional—IRA was created by the 1974 legislation known as the Employee Retirement Income Security Act, or ERISA. It was conceived as a tax-advantaged retirement saving option for those who had no access to a plan through their employer. In 1981 the privilege was extended to those who participate in employer plans. The Traditional IRA was later supplemented by the Roth IRA, created by the Tax Reform Act of 1997. In 2019, IRAs held the largest market segment, as shown below.
IRAs: $11 trillion
Private Defined Contribution Plans: $7.3 trillion
Public Defined Benefit Plans: $5.4 trillion
Private Defined Benefit Plans: $3.3 trillion
Govt. Defined Contribution Plans: $2.3 trillion
Traditional and Roth IRA Asset Growth 2014 to 2019
IRAs have, since their inception, become important not only to annual saving, but as destinations for rollovers from employment-based plans at retirement. In fact, the greater portion of total IRA balances is now attributable to rollovers, not contributions.
Traditional IRAs
Traditional IRA balances rose 50.1% over this 5-year period, from $6.23 trillion to $9.35 trillion. Of this increase, 49% was due to the inflow of rollovers from employer plans, 49% by market appreciation of investments, and just 2% by annual IRA contributions.
Roth IRAs
Roth IRAs present a very different picture. Because the majority of assets held in employer plans are non-Roth in nature, and rollover from those non-Roth accounts to a Roth IRA would be a taxable event, a smaller share of Roth IRA assets is attributable to rollovers. Roth IRA balances rose by 70% from 2014 to 2019, from $600 billion to $1.02 trillion. Market appreciation drove 51% of the growth, while 23% arrived by rollovers from employer plans and Traditional-to-Roth IRA conversions, the remaining 26% owing to annual contributions.
What Kind of IRA?
“IRA” is not a singular term, even beyond Traditional and Roth IRAs. Savings incentive match plans for employees of small employers (SIMPLE) IRA plans are deferral type plans—like 401(k) plans—with limited employer contributions, and are well suited to small employers. In fact, employers with more than 100 eligible employees cannot offer SIMPLE IRA plans.
Simplified employee pension (SEP) plans are similar to profit sharing plans: only employer contributions are made, making them well-suited to those businesses that have few or no common-law employees. They are ideal for sole proprietors, or businesses operated by spouses. SEP contributions are held in Traditional IRAs.
Following is a breakdown of assets by IRA and IRA-based plan type
Traditional IRAs: $9.4 trillion
Roth IRAs: $1.0 trillion
SEP plans: $515 billion
SIMPLE IRA plans: $140 billion
HSA Interest Among Industry Service Providers
High-deductible health insurance plans and accompanying health savings accounts (HSAs) have become an increasingly common way for workers to get health insurance from their employers. Every session of Congress seems to bring legislative proposals to liberalize HSA provisions, and in all probability their use will continue to expand. Data from the three-year period 2017 to 2020 verifies growing interest in offering HSA services on the part of industry service providers surveyed by Cerulli.
Market participation 2017: 21% of surveyed organizations
Market participation 2020: 67% of surveyed organizations
Beyond this three-fold increase in industry participation from 2017 to 2020, 86% of the 33% that are not currently participating in the HSA market indicate they are considering entering in the future.
