WASHINGTON —The U.S. retirement system still hasn't fully recovered from the stock market's nosedive five years ago.
Total pension and retirement plan assets hit $10.4 trillion in 1999, but reached only $9.4 trillion at the end of last year, according to the latest Federal Reserve Board flow of funds data.
Assets of private defined benefit plans peaked at $2.97 trillion in 1999, but totaled only $1.8 trillion at year-end 2004. (The Fed included the $94.7 billion in assets of the Federal Thrift Savings Fund in its private system total in 1999, but doesn't do so any more.) Assets in private defined contribution plans rebounded from the $1.9 trillion trough in 2002 to $2.6 trillion at the end of 2004.
Public and federal plans had $2.07 trillion in assets at the end of last year, about the same as in 2000, the earliest year of the Federal Reserve's historical data on the public sector.
"The pattern of the dip and recovery just mirrors the stock market," observed Julia Coronado, a senior research analyst at Watson Wyatt Worldwide, Washington, and, until February, an economist at the Federal Reserve Board.
More importantly, the slow recovery of the retirement system could spell trouble for those at or near retirement age.
Not enough expansion
"The assets are not growing at a rate that might be desirable, given the aging of the population," said Dallas L. Salisbury, president of the Employee Benefit Research Institute, a Washington-based research organization.
"It just reinforces that the system has not been expanding," as represented by the continuing decline in the number of active workers who are participants in defined benefit plans, he added. The numbers also show that workers covered by defined contribution plans are not saving enough, he said.
Private pension plans held about $925.9 billion in domestic and international equities at the end of 2004, approximately 51.3% of their total assets; private defined contribution retirement plans held about $1.9 trillion in equities, or 73% of their total assets. The higher DC number likely is due to the use of company stock in 401(k) plans. Equity ownership by private pension plans has been declining since 1997.
At the same time, public pension plans' equity holdings have been growing, to a record $1.2 trillion last year, or 58.1% of total assets.
But individual retirement accounts continue to hold more assets than either private pension or private defined contribution plans, a trend that emerged in 2000.
IRA assets topped the $3 trillion mark at the end of 2003, the most recent year for which statistics are available. That's a 202.8% increase from 10 years ago.
Experts say the IRA total will continue to soar, thanks to rollovers to IRAs from participants who take lump-sum payments from pension and retirement plans.
"A very substantial portion of the defined benefit system now pays lump-sum distributions, and almost all of the defined contribution system pays lump-sum distributions," Mr. Salisbury noted. "The bulk of the pension system as we know it today — both defined benefit and defined contribution — is moving away from providing protection against living a long time and investment risk," he said.
Net flows into IRAs
Net flows into IRAs were a mere $86.7 billion in 1993, but they more than doubled to $203.8 billion in 2003, the Fed data show.
In contrast, private defined contribution plans recorded net inflows of only $20 billion in 2004, or a 50% drop from a decade earlier.
"Money is still going into these plans, but more money is going out of the plans (because) a lot of people have accumulated significant 401(k) plan assets and are changing jobs and rolling them over into IRAs," Watson Wyatt's Ms. Coronado said.
The exception is the Thrift Savings Fund, the defined contribution plan for federal employees, which recorded net inflows of $12.1 billion in 2004, almost double that of 2000. The TSF grew a robust 55% to $152 billion at the end of 2004.
Meanwhile, private defined benefit pension plans are continuing to pay out more money in benefits than they take in through contributions. That trend has been blunted somewhat in the past two years as employers poured billions of dollars into their underfunded pension plans to meet the requirements of federal pension law and to avoid paying higher insurance premiums to the Pension Benefit Guaranty Corp.
Net outflows from private pension plans dropped to $22.7 billion in 2004, from a record $103.6 billion in 2000.
The central bank's flow of funds data is based on Form 5500 for the year 2002. Statistics for 2003 and 2004 are estimates, which will be adjusted in subsequent years to reflect the actual data from the 5500 forms.
Total pension and retirement assets include private sector defined benefit and defined contribution plans, public pension plans, the Federal Thrift Savings Fund and federal pension plans, as well as private pension assets held by life insurance companies. Excluded are statistics for 2004 on IRAs. That information is collected separately by the Investment Company Institute, Washington, and won't be available until the middle of the year.