WASHINGTON - Individual retirement accounts have become the nation's largest pool of private retirement assets, eclipsing private-sector defined benefit and defined contribution plans, data from the Federal Reserve Board show.
IRA assets more than quadrupled in the past decade, from a mere $64 billion in 1990 to a sizable $2.65 trillion in 2000, the latest year for which data are available. That surpassed the $2.51 trillion in private-sector defined contribution assets that year, and $2.03 trillion in private-sector defined benefit assets.
That trend is expected to continue as young workers roll over assets from employer-sponsored retirement plans into IRAs when they switch jobs, and as more older workers collect large payouts from retirement plans when they quit working. Also fueling the trend is the conversion of traditional defined benefit plans into cash balance and other hybrid plans, encouraging workers to take lump sums, some experts said.
According to the central bank's estimates, private-sector defined contribution assets dipped to $2.3 trillion in 2001, and private-sector pension plan assets dipped to $1.8 trillion last year. The Federal Reserve's data for the private-sector plans include the $100.5 billion in defined contribution assets of the Thrift Savings Plan for federal workers.
"IRAs are becoming one of the fastest growing components of retirement wealth, and I don't expect that to change any time in the future," said Julia Coronado, a Fed economist who collected and analyzed the data.
Pension assets down
Overall, the Fed estimated total pension assets, including public sector and federal plans and pension plan assets held by life insurance companies, declined 4% to $8.7 trillion in 2001, from $9.1 trillion in 2000. The Fed previously had estimated total plan assets of $9.8 trillion in 2000, but lowered its estimates based on more recent numbers. The Fed's numbers are projected from the 1998 annual reports filed by employers with federal regulators, the latest numbers available.
In contrast to the private sector, there has been no runoff of assets from public-sector plans into IRAs, the data show. Public-sector plans took in $24.1 billion more than they paid out in 2001, and the total assets for state and local government retirement funds dropped a mere $11 billion to an estimated $2.2 trillion last year from $2.1 trillion in 2000, representing the decline in the stock market. At the same time, federal pension fund assets grew to $77 billion in 2001, up from $70 billion the previous year.
"Institutional 401(k) plans are becoming an incubator for individually held accounts," noted Peter H. Starr, managing director of institutional markets at Cerulli Associates, a Boston-based research firm that first predicted the runoff from defined contribution plans into IRAs more than a year ago.
"The defined contribution plan industry is growing from the top end, but hemorrhaging assets out of the back end," he said.
Cerulli estimates that by 2006, as much as $500 billion a year could flow out of defined contribution plans and into IRAs. The surge in IRA assets at the expense of private-sector retirement plan assets, primarily 401(k)s, could lead to the departure of some full-service retirement plan providers from the institutional money management business, he warned. "The firms that are the exceptions are those that enjoy a broad retail presence with consumers," such as the Vanguard Group and Fidelity Investments, he said. But even they could lose out to brokerage firms, investment advisers and financial planners when competing for rollovers in excess of $100,000, Mr. Starr pointed out.
Runoff not so big
That is not to say the runoff from private-sector defined contribution plans into IRAs is so huge it surpasses what they are taking in. According to the Fed, private defined contribution plans took in a net $42 billion in assets in 2001, compared with a net inflow of $42.2 billion in 2000. Retirement plans also have been hurt by the decline in the stock market - just under half of their assets are invested in equities held directly; they also hold equities indirectly through mutual funds, and in separate accounts at life insurance companies, so their total ownership of equities may be even higher.
Experts do not see as worrisome the flow of money from employer-sponsored, professionally managed retirement plans into accounts where individuals are free to invest wherever they like. "Most of these rollover IRAs are going to the same financial institutions that manage 401(k) plans, and are professionally managed in the same way that 401(k) plans are," said Dallas L. Salisbury, president of the Washington-based Employee Benefit Research Institute. But Mr. Salisbury does worry that the enactment of legislative proposals to limit ownership of employer stock in defined contribution plans would have deleterious effects because those limits would not apply once participants roll over their money into IRAs. "Then there will be two different sets of rules - you may have protected (participants) in a 401(k) plan, but made them even more vulnerable in an IRA," he said.
Things may change
At the same time, the older, more mature private-sector traditional pension funds also are losing money - but that might change, thanks to the precipitous decline of the stock market, suggested Ira Siegler, a principal at Buck Consultants in Teaneck, N.J. That's because the bull market that ended in early 2000 fattened pension fund coffers and gave employers a long respite from contributing money to their pension funds. But the stock market's decline for the past two years has reduced funding levels, so many employers need to start pouring money into their pension funds again, he said.
Private pension funds had net outflows of $38.2 billion in 2001, the seventh consecutive year in which they paid out more money than they took in as contributions and investment earnings.
At the same time, private pension funds also are continuing to move huge sums of money out of equities, perhaps as part of an effort to liquefy assets to pay for benefits, the Fed's Ms. Coronado suggested. In 2001, private pension funds had net outflows of $44 billion from stocks, higher than the entire total $38 billion net payouts from these plans.
The outflow of money from defined benefit plans, which began in 1995, according to the Fed data, also can be blamed on plan shutdowns by many employers. It is no secret that traditional pension plans have been declining for years. The number of defined benefit pension plans dropped from 114,000 at their peak in 1985 to around 35,000 by Sept. 30, 2001, according to the latest data from the Pension Benefit Guaranty Corp., Washington.