Recent research from the Employee Benefit Research Institute (EBRI) found that the average individual retirement account (IRA) balance increased from $93,441 in 2013 to $114,383 in 2017, an increase of 22.4%.
The average contribution to a traditional or Roth IRA slightly increased from $3,880 in 2013 to $3,913 in 2017.
The good news in growth was tempered by the fact that EBRI also found that 24.4% of IRAs had less than 10% in equities, representing so-called “extreme allocations.” Furthermore, 16.4% of IRAs had more than 90% of their assets in bonds and money.
In particular, there was high money concentration in accounts with balances of less than $5,000, of which many were a result of automatic rollovers from 401(k) plans that are defaulted into money—the result of the safe harbor provisions for the forced cashouts of 401(k) plans with balances of $1,000 up to $5,000.
As prior EBRI research has shown, the assets typically stay where they are initially allocated. Consequently, the allocations in these IRAs end up staying in money, as a result of the default investment and not the result of the actions of the account owners.
Importantly, assets from rollovers to IRAs in 2017 greatly outpaced total contributions, regardless of the source.
The average and median rollovers to a traditional IRA in 2017 were $94,879 and $14,454, respectively, while the average contribution to a traditional IRA in 2017 was $4,163.
Overall, just over 12% of all accounts in the database received a contribution in 2017, averaging $3,913. Roth IRAs were more likely to receive a contribution than traditional IRAs (26.6% vs. 5.7%).
Withdrawal activity
The study also assessed withdrawal activity. Just over 21% of individuals owning a Traditional or Roth IRA took a withdrawal in 2017.
However, only 3.3% of individuals with a Roth took a withdrawal and 25.6% of individuals with a Traditional IRA took a withdrawal. Upon closer examination, EBRI finds that the overall IRA withdrawal% was largely driven by required minimum distribution (RMD) rules.
As with the force-out safe harbor, RMDs appear to drive behavior in IRAs, with only one-quarter of IRA owners ages 71 or older found to have withdrawn an amount from their Traditional IRA in excess of their RMD.
“This study demonstrates the power of defaults and signaling in influencing behavior in IRAs,” Craig Copeland, Senior Research Associate at EBRI and author of the report, said in a statement. “The asset allocation in accounts with balances less than $5,000 seem to be largely driven by the default investment of forced cashouts. Furthermore, individuals who don’t know how much to withdraw from their IRA in many instances are simply defaulting to the RMD, assuming that is the ‘correct’ amount to withdraw.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
