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IRA account assets are rising. In May,
The Investment Company Institute reported that IRA assets in mutual funds stood at $1.222
trillion dollars, whereas assets in 401(k) plans weighed in at $1.204 trillion.
Disturbingly, Americans aren't saving more
toward retirement. Rather, they're better using tax-deferred protective shells, moving
retirement money from 401(k) plans to IRAs when they change jobs. And, existing IRA
balances are growing.
For years, cumulative 401(k)-account balances have outpaced
total IRA balances. Now, IRAs are king of the hill. But, this new trend seems to indicate
that those who have been saving are doing better than ever, instead of showing that more
folks are saving. What's really happening is workers, when they change jobs or retire, are
moving their retirement money out of plans like 401(k)s or 403(b)s into IRA accounts.
"A lot of money is being rolled over into IRAs," said Dallas Salisbury, CEO and
president of the Employee Benefit Research Institute (EBRI). The lesson: Some, a small
minority, are doing a great job of saving for retirement. The rest still have some work to
do.
The challenge: To get retirement savings rates up.
Congressional Efforts
The main issue for Congress is how to get more employees to
save more money in qualified-retirement accounts, thereby reducing their dependence on
federal retirement programs. American's are failing to take full advantage of
tax-sheltered savings accounts. While 401(k)s are popular with employees — about 83
percent of workers offered 401(k) plans participate in them, says the Profit
Sharing/401(k) Council of America — IRA accounts must feel a bit left behind, used by
only 22 percent of working Americans, according to EBRI. The latest legislative initiative
is to raise the annual IRA-contribution limit to $5,000, from $2,000, in the hope of
boosting IRA-contribution rates. The House Ways and Means Committee is discussing whether
to add that plan to retirement-security legislation being crafted this month, said Trent
Duffy, spokesman for the committee.
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"The IRA growth is not new money,
it is mainly rollovers."
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| —Dallas
Salisbury, CEO and president, Employee Benefit Research Institute. |
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Sen. William Roth, R-Del., a proponent of retirement saving
through IRAs, wants to raise contribution limits for all retirement plans. But, with an
election looming this year, the prospects for any retirement legislation passing aren't
bright, said Bill Sweetnam, tax counsel to the Senate Finance Committee majority.
Even if Congress passes a bill, it may not be signed into
law by the president. "We know that the (Clinton) administration isn't favoring limit
increases," he said.
Further, to try to encourage workers to leave their
retirement money in qualified-savings plans, several congressional legislators want to
make it easier to roll money from one type of defined-contribution plan to another.
Currently, you can't roll 401(k) money into a 403(b) plan, or from a 457 plan into a
401(k).
Again, such "portability" legislation is likely
to be stalled. In 1999, Republicans tacked this language onto the tax bill that Clinton
vetoed.
Need for Education
One trend the data has definitely captured is the fact that
existing saver's balances are increasing.
Still, some retirement-plan advocates feel that not enough
is being done to bring new people into the system, or keep them there.
Admittedly, the passage of the 1997 Taxpayer Relief Act
sparked a flurry of advertising by brokerage firms trolling for new savers. That raised
awareness. And, the study from the Investment Company Institute showed that at least
one-third of the folks opening Roth IRAs were opening their first IRA account.
"We are very happy with the contributions going into
the Roth IRA," Sweetnam said.
But, other news is troubling. In a study released in May,
Hewitt Associates, an employee-benefits consulting firm, found that about 68 percent of
employees opt to take a cash payout from their 401(k) plan when changing jobs. The
remaining 32 percent of workers roll their money into an IRA (most common) or into a new
employer's plan.
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In a study released in May, Hewitt
Associates, an employee-benefits consulting firm, found that about 68 percent of employees
opt to take a cash payout from their 401(k) plan when changing jobs. The remaining 32
percent of workers roll their money into an IRA (most common) or into a new employer's
plan.
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The real issue is that workers don't understand the value
of enrolling in plans and staying in them, say retirement experts.
One way to increase worker participation is through
education; a responsibility that falls to congressional committees overseeing the Labor
Department. Both the tax code and the Employee Retirement Income Security Act (ERISA),
which is administered by the department, govern defined-contribution retirement plans.
A few education initiatives may be added to the Ways and
Means Committee bill, Duffy said. As legislation is still in the discussion phase, he
couldn't be specific.
History Lesson
To further understand why IRA assets are surpassing 401(k)
assets requires a short history lesson. Savings habits are often influenced by
congressional policy.
Both the IRA and 401(k) plans are relatively new
retirement-savings tools. IRAs were created in the mid-1970s.
In the 1980s, Congress slapped on a bunch of restrictions
over who was eligible to participate in an IRA and what contributions could be deducted.
Subsequently, IRA contributions slacked off and in their stead rose the 401(k) plan.
Congress created the framework for the 401(k) plan in 1978
when it revised the tax code. At that time, their main concern was that cash-strapped
corporations were raiding pension funds, thereby threatening workers' retirement security.
Still, the first 401(k) plan didn't come into being until 1981. As more and more employers
began adopting 401(k) plans, retirement-asset growth in them outstripped IRAs.
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"If you are eligible to
participate in a 401(k), you should maximize it."
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| —Mark Podolsky,
certified financial planner, Financial Solutions Associates in Dedham, Mass. |
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In 1997, IRAs got a big boost when Sen. William Roth,
R-Del., created a new kind of IRA account in the Taxpayer Relief Act. It was called the
Roth IRA and is seen by some to be one of the best retirement instruments available. With
a Roth IRA, you contribute after-tax money to the account. Your money can grow tax-free
and you can take tax-free withdrawals.
Further, the Act included provisions to allow spouses to
set up IRA accounts. Previously, spouses of workers participating in an employer-sponsored
plan couldn't set up an IRA.
Also, a new IRA was created for parents looking to save for
a child's college education, called appropriately enough, the Education IRA.
IRA or 401(k)?
Which plan is the best for you depends upon your personal
situation.
401(k) plans still hold many advantages over IRAs, said
certified financial planner, Mark Podolsky, with Financial Solutions Associates in Dedham,
Mass.
For instance, 401(k) plans have higher annual-contribution
limits than IRAs, $10,500 as opposed to $2,000. Many 401(k) plans offer employer-matching
contributions, and loans against your balance. The assets are protected from creditors,
and you can retire at age 55 and begin to withdraw money from your 401(k). The
disadvantage is that you may have limited investment choices.
IRAs, in contrast, offer flexible investment choices. But,
you can't make early withdrawals at age 55 without paying a penalty. You can, however,
avoid the penalty by setting up an annuity payment schedule. Further, IRA assets are
protected from creditors by state law and your state may not provide the same strong
protections as federal law.
In general, folks get their first taste of retirement
saving with an employer-sponsored 401(k) plan, then move into IRAs when they leave their
job.
"If you are eligible to participate in a 401(k), you
should maximize it," Podolsky advised. |
