“Like” Minded?

Several weeks back, my wife and I sat down with a financial planner to review and update our financial plans. Doing so brought with it a bit of personal trepidation since, being “in the business” I not only had a working knowledge of what needed to be done, I also had a pretty good sense of what hadn’t been done, and what hadn’t been done the way it should have been done in some time. As I surrendered copies of the statements from my three separate 401(k) accounts, rollover IRA, traditional IRA, and SEP-IRA, I found myself wondering (again) why I hadn’t gotten around to consolidating some of those accounts.

More and more Americans are finding themselves with multiple savings accounts, not only because of the relatively consistent pattern of job change in the American economy (see “Tenure, Tracked”), but because those job changes frequently result in rollovers to individual retirement accounts. On the other hand, in recent years, it has gotten easier to simply leave your 401(k) with a prior employer’s plan, and, with the convenience of online access and/or call center support, and the allure of inertia, many have surely opted to forestall, if not postpone the decision.

Those decisions have, of course, made it harder to assess the true accumulations in these plans. Indeed, today’s “average” 401(k) calculation suffers not only from being an average of widely varied tenure and age components, it increasingly represents the average of those balances with only a current employer plan.

But if you’re an individual worried about keeping up with all those accounts―or a regulator or policymaker concerned about the growing complexity of that task for those individuals―you might well wonder how those accounts are being managed? Are the investment allocations in those IRAs different from that of the 401(k)s?

New EBRI research (see “Retirement Plan Participation and Asset Allocation, 2010”) reveals that, in addition to demographic factors related to family heads, asset allocation within a family head’s retirement plan does seem to be affected by his or her ownership of other types of retirement plans.

According to the research, which was based on estimates from the Federal Reserve’s 2010 Survey of Consumer Finances,¹ those who own an IRA are more likely to be invested all in stocks if they also own a 401(k)-type of plan, and those who own a defined benefit (DB) plan and a 401(k)-type plan are also less likely to allocate the investments of that defined contribution plan to all interest-earning assets. Moreover, those family heads who are invested more heavily in stocks in their 401(k)-type plan and also own an IRA have a high probability of also being heavily invested in stocks in their IRA.

The bottom line? Participants in these plans generally invest them in similar manners, although some participants did have significantly different allocations across the two plan types. What we don’t know is if those similarities―and differences―are the result of conscious choice based on an awareness of these various plans, a consequence of investments in target-date or balanced funds, or mere coincidence.

Nevin E. Adams, JD

¹ It is worth noting that, while these results provide important information on behavior within retirement savings plans, it is self-reported data from a survey of a small sample of respondents, and does not include the type of detail on asset allocation within 401(k) plans that is provided by the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project or on IRAs that is provided by the EBRI IRA Database. However, these results do provide some evidence of how participants who own both types of retirement plans allocate their assets among both types of plans, and this can be evaluated with future results from the combined IRA and 401(k) database that EBRI is currently completing.