WASHINGTON — The Federal Reserve board’s recently released report on the flow of the nation’s financial assets provides new evidence that defined benefit plans are in their golden years while the defined contribution system is still in its dewy-eyed youth.
According to the Federal Reserve report released March 8, a combined $8 trillion were in private defined benefit and defined contribution assets in 2006, including $2.4 trillion of DB and DC assets held by insurance companies. The total was up 9.3% from $7.32 trillion, including $2.2 trillion held by insurance companies, in 2005.
Although private defined benefit plans suffered $68.5 billion in net outflows last year, those outflows actually slowed. Net outflows totaled $88.3 billion the previous year.
Similarly, while private defined contribution plans had total net inflows of $29.9 billion in 2006, that was down from $40.3 billion in inflows the previous year.
Total retirement assets were $16 trillion in 2006, up 9% from a year earlier.
Although the amount has fluctuated through the years, DB plans have had outflows every year since 1994, when there was an inflow of $45.2 billion. At the same time, DC plans have had inflows of funds since 1994, according to the Federal Reserve’s report.
No surprise
“With many companies freezing or reducing their DB plans and enhancing their DC plans, it’s unsurprising that we’ll see growth in DC contributions,” said Carl Hess, director of investment consulting at Watson Wyatt Worldwide, New York.
“They (defined benefit plans) have got more retirees than workers, meaning more money is going out for benefits than is coming in as contributions from the employers,” added Ron Gebhardtsbauer, senior pension fellow for the American Academy of Actuaries, Washington.
Defined contribution plans, meanwhile, are still growing, replacing DB plans as a key retirement vehicle for many younger workers. “You don’t have the huge overhang of retirees pulling money out of them (DC plans) that you do in DB plans,” he said.
The report also showed $2.98 trillion in state and local retirement assets, up 10.4% from a year earlier, and $1.14 trillion in federal retirement assets, up 6.5%
The official individual retirement account and Keogh tallies for 2006 are slated to be reported by the mutual fund industry’s Investment Company Institute, Washington, in May. But Mr. Gebhardtsbauer is projecting a $4 trillion total for IRAs and Keoghs based on the 2005 total of $3.7 trillion included in the Federal Reserve’s March 8 report.
Of the total $2.3 trillion in private DB assets not held by insurance companies in 2006, 70%, or $1.6 trillion, was invested in stock, according to the Federal Reserve report. In 2005, of the total $2.15 trillion in DB assets not held by insurance companies, 68.5% was invested in stocks.
Of the total $3.3 trillion of defined contribution plan assets not held by insurance companies in 2006, 64% or $2.1 trillion were invested in stock, the report said. That compares with total DC assets of $2.97 trillion in 2005, with 64%, or $1.88 trillion, invested in stocks, according to the report.
14% of total
According to Mr. Gebhardtsbauer, private DB assets not held by insurance companies last year accounted for 14% of the total retirement assets of $16 trillion, including his projections that $4 trillion were in IRA and Keogh accounts. In 1985, private DB assets not held by insurance companies represented 33% of the total retirement assets of $2.3 trillion, Mr. Gebhardtsbauer said.
Overall assets in private non-insured defined benefit plans were $2.28 trillion in 2006, up 6% from $2.15 trillion the previous year, according to the report. Also according to the report, private defined contribution plans had assets of $3.28 trillion at the end of 2006, up 10.4% from $2.97 trillion at the end of 2005.
“That means there was sufficient equity market return to allow for an increase in (defined benefit) assets even though what was paid out was more than was contributed during the year,” said Craig Copeland, senior research associate for the Employee Benefit Research Institute, Washington.
Thirty-eight percent of total household assets of $42 trillion were in retirement accounts in 2006, the same as in 2005, according to the Fed. That’s still a dramatic improvement from 1971, when only 10% of household assets were in retirement accounts, Mr. Gebhardtsbauer said.
“The total amount of retirement money has continued to increase as a percentage of total assets,” Mr. Gebhardtsbauer said.
“It shows the commitment of households to this goal of saving for retirement,” added Sarah Holden, ICI director of retirement and investor research.
