EBRI Assesses the Impact of Having Both a 401(k) and an IRA

The new study from EBRI provides a unique perspective on the relative amount of assets held by those with both account types, allowing for a more accurate picture of the total retirement assets of Americans.

 

By combining the EBRI/ICI 401(k) Database of 27 million plan participants and the EBRI IRA database of 19 million accountholders, EBRI finds that individuals maintaining both a 401(k) and an IRA have combined assets that are, on average, about 2.5 times larger than the average 401(k) balance. 
What’s more, the median combined balance is approximately 3.5 times the median 401(k) balance, EBRI further reports in "Having Both a 401(k) Plan and an IRA: How Much Does This Change the Retirement Asset Picture?." 

EBRI compares the impact of maintaining both a 401(k) plan and an IRA over an entire seven-year study period, followed by a comparison of those who had only one account type or some combination of both against those who maintained both account types over the entire study period. This is an important comparison, EBRI notes, because as individuals move between jobs or into retirement, both the plans in which they hold their assets and their ability to contribute to them are likely to change.

 

The brief also compares the share of assets held in 401(k) plans with those held in the IRAs to show how the asset types evolve as participants age and move between jobs or into retirement. One conclusion suggests that leakage and a decline in the average balance relative to prior years is associated with those who do not maintain both account types. 

 

“This research points to the importance of understanding multiple sources of retirement assets rather than just one source,” explains Craig Copeland, Senior Research Associate at EBRI and author of the report. “Both when it comes to aggregate retirement assets and the interaction of different account types within the system.”

 

 

The 2.5 ratio cited above, of course, varied with age, with both the youngest (ages less than 30) and oldest (ages 60 or older) having ratios above 2.5, while those in between had lower ratios. EBRI notes that this has to do with the share of assets coming from the 401(k) plan being lower at younger and older ages.

 

Not surprisingly, the share of total assets represented by 401(k) plans increased each year, as growth within 401(k) plans surpassed that in IRAs, due, in part, to the higher contribution limits in 401(k) plans, the possibility of employer contributions and the higher likelihood of making any contribution to this account type. 

 

EBRI notes, however, that many of those with both account types in the same year did not maintain them for long periods, as they are changing jobs or retiring, and the ratios of combined assets went down if both accounts were not maintained throughout the time period examined. 

 

Still, EBRI found that the average balance of those having 401(k)/IRA balances in every year of the study is twice as high relative to the average balance of those having both at only some point during the study.

 

The median balance ratios followed the same trends as the average balance ratios but at higher levels and with larger slopes, the brief further explains. For example, the median combined balance was 4.10 times larger than the median 401(k) plan balance in year zero, decreasing to 3.55 in Year 6. The ratio of the median combined balance to the median IRA balance increased sharply after Year 4, reaching 5.33 in Year 6 after a more gradual increase from 3.94 in Year zero to 4.41 in Year 4.  

 

When looking at the average combined balances of those having both account types at some point compared with the average combined balances of those having both every year, the ratio of the combined every-year balances to the some-year balances held steady at about 1.50 from year zero through Year 4 before the ratio increased significantly, reaching 2.03 in Year 6. 

 

This demonstrates the impact of failing to have the continual buildup in 401(k) plans, the brief explains, emphasizing that it points to the impact of the potential leakage when funds are moved from these account types, particularly relative to that of maintaining the same accounts over the entire study period.

 

“This report shows the potential of what can be accumulated in total if workers are able maintain both account types throughout their working lives—or large portions of them,” notes Copeland. “Furthermore, it shows that this potential is not always met as workers change jobs, stop contributing, or take money out of or close their accounts, resulting in retirement asset leakage.”