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DC Plans Reign Among Individual Account Plans

Practice Management

A new study by the Employee Benefit Research Institute examining individual account (IA) retirement plans finds that defined contribution balances grew modestly between 2016 and 2019, but their prevalence is much higher than they were in 1992. 

In "The Status of American Families’ Accumulations in Individual Account Retirement Plans, and Differences by Race/Ethnicity," EBRI reveals that in 2019, 66% of all families that had an active participant in an employment-based retirement plan from a current employer only had a DC plan—up from 37.5% in 1992. The findings are based on an analysis of the 2019 Survey of Consumer Finances (SCF). 

IA retirement plans include employment-based retirement savings plans financed by both employer and employee contributions—most notably, defined contribution plans such as 401(k) plans—as well as Keogh plans for the self-employed and IRAs.

The average account balance of those families owning IA plans increased from $79,262 in 1992 to $258,453 in 2019, according to EBRI. The study also finds median net worth for families that owned IA assets was $284,050 in 2019, compared with $35,460 for families without IAs. 

As DC plans have proliferated in the private sector, IA retirement plans have become the predominant source of financial assets for American families holding these plans, the report notes. “In fact, in 2019, IA constituted more than two-thirds of financial assets at the median for families owning IA plans,” explains Craig Copeland, EBRI Senior Research Associate and author of the report. “Not only do IAs make up a large portion of families’ financial holdings, but those with IAs also have substantially higher levels of net worth than those families without them.”

What’s more, families owning these assets were more likely to own a home and have greater net worth, indicating that those holding these assets are on a firmer financial path than those without these assets.

And while IRA assets have continued to grow, overtaking assets in private-sector DC plans by 2001 and reaching a point of being 49% larger than assets held in private-sector DC plans by the end of 2019, EBRI observes that this growth has been at least partially attributable to rollovers from assets built up in employment-based plans. “Indeed, much of the assets from DC plans have ended up in IRAs, where individuals draw them down to fund their retirement as necessary or as required by the required minimum distribution rules,” the report emphasizes. 

In a bit of a surprise, despite the strong growth in the economy from 2016 to 2019, the study also finds that, among families with a DC plan, the average balance in 2019 was $175,055, which was a real decrease of 2% from $178,639 in 2016 but an increase of 14% from $153,687 in 2010. In addition, the average total balance of those families with at least one IRA/Keogh plan or DC account increased 5%, from $247,289 in 2016 to $258,453 in 2019. 

Minority Divide

An area of concern, according to EBRI, is that families with minority heads were much less likely to have IA retirement plans than other families, and when they did own these plans, the median amount held in them was significantly less. Yet, the IA assets held by these families were a larger share of their total financial assets than families with white, non-Hispanic heads. 

“Unfortunately, this gap between families with different races/ethnicities has persisted since at least 1992,” says Copeland. “As a result, families with minority heads are generally in a much worse position in their preparation for retirement in terms of IA retirement plan assets, and consequently have much less flexibility in financing retirement without these assets.”

In 2019, the likelihood of having a retirement plan was nearly twice as likely for families with white, non-Hispanic heads compared with families with Hispanic heads—71.1% versus 37.4%. The study also found just over half (50.6%) of Black/African American heads owned a retirement plan. 

While the largest gap exists with ownership of IRAs, there is also a gap when it comes to the ownership of DC plans from a current or former employer. According to the study, families with minority heads had ownership rates one-third to nearly one-half less than the families with white, non-Hispanic heads. In part, this gap is attributable to the fact that, in 2019, only 31.8% of Hispanic working family heads were even eligible for a DC plan and 48.3% of African American working family heads were eligible. In contrast, nearly 60% of white, non-Hispanic working family heads were eligible. These disparities have held back to 2007, but have worsened in recent years, EBRI notes.  

Moreover, Black/African American and Hispanic working family heads are less likely to participate in a DC plan, even when eligible. In 2019, 81% of white, non-Hispanic working family heads participated in a DC plan when eligible, compared with 70.2% for African American working family heads and 62.8% for Hispanic working family heads.