A Lot, But Still Not Enough

July 25, 2006

Retirement assets swell to a record $14.5 trillion in 2005, up 40 percent since 2002; still not enough?

The Investment Company Institute (ICI) has published its annual report regarding the state of the U.S. retirement market and its importance to mutual funds and their investors.  ICI's July findings note retirement assets swelled to a record level of $14.5 trillion in 2005, a 7 percent increase over the previous year, and a whopping 40 percent rise since the bear market of 2002.  Retirement savings have also come to represent an increasingly large share of American wealth, at approximately 38 percent of household financial assets. 

According to the report, Americans continue to grow their retirement savings primarily by way of plans sponsored by private and government employers.  These employer-sponsored plans, which include annuities, IRAs, defined benefit (DB) and defined contribution (DC) pension plans, directly hold 65 percent of retirement assets. The individually-directed DCs and IRAs have been especially popular.  Assets invested in these vehicles grew nearly 9 percent in 2005, nearly double the asset growth rate for defined benefit (DB) plans and annuities, which grew at less than 5 percent.  As of year-end 2005, IRAs held an estimated $3.7 trillion, a significant portion of which is derived from rollover plans like the 401(k).  Americans still hold an estimated $2.4 trillion dollars in 401(k) plans. 

Mutual funds have benefited from the growth in popularity of individually directed plans, and today manage a far greater share of the retirement market than they did in 1990.  In 2005, mutual funds managed $3.4 trillion in retirement account assets, about equally divided among DC plans and IRAs.  Yet mutual fund market share appears to have reached a plateau.  While the percentage of IRA assets managed by mutual funds more than doubled between 1990 and 1997, from 22 to 45 percent, mutual funds' share in this important category has hovered around 45 percent since the late-1990s. 

Looking at the market from the mutual fund investor's vantage, one notices a strong preference for long-term funds and, more specifically, stock funds.  In 2005, $2.4 trillion of the $3.4 trillion of DC and IRA mutual fund assets were invested in equities funds, followed by $453 billion in hybrid funds, $331 billion in bond funds, and $273 billion in money market funds.  Investors and retirement plan sponsors have recently shown an appetite for lifestyle and lifecycle funds, such as the target date funds from Vanguard, Barclays and others.  These funds follow a predetermined reallocation of risk over time and rebalance to become more conservative and income producing by the target date.

One product that's yet to make a major impact on the retirement scene is ETFs, but that fact could be changing as more outfits like Invest N' Retire figure out how to work-around the impact of commissions on regular ETF investors by grouping trades together and spreading the cost of commissions among multiple players.

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