NEW YORK — Americans’ nest eggs grew last year, but the market’s rocky performance ensured that they didn’t fatten as much as they had in the previous year.
Overall U.S. retirement assets rose by $1.1 trillion in 2007 to $17.6 trillion, according to the Washington, D.C.-based Investment Company Institute, which represents the mutual fund industry. The 7% increase, which reflects contributions and asset appreciation, lagged the growth in retirement assets from 2005 to 2006, when nest eggs grew by $1.7 trillion, a nearly 12% increase, according to the ICI.
The institute will release its 2008 Investment Company Fact Book, which offers a comprehensive look at the scope of the nation’s retirement market, on Thursday. The ICI combines its data on individual retirement accounts and defined-contribution plans with publicly available data on defined-benefit plans, government employees’ plans and annuities to produce the report, which is considered an important annual snapshot of the overall retirement market, and which will be incorporated into government data.
Investors placed about $176 billion into mutual funds through individual retirement accounts and defined-contribution plans in the first three quarters of 2007, more than they had invested by the same means in all of 2006, said Brian Reid, the ICI’s chief economist. So the lower year-over-year growth rate in nest eggs was largely due to last year’s poor market performance, he said.
But, he noted that “in a not particularly good year for the market, still there were enormous gains for retirement savings.” Retirement assets accounted for nearly 40% of U.S. households’ financial assets at the end of 2007, up from 39% in 2006, the ICI found. The $17.6 trillion invested in retirement assets at year-end 2007 compared with about $16.4 trillion at year-end 2006 and $14.6 trillion at year-end 2005.Often overlooked, said Reid, is the important role that individual retirement accounts and defined-contribution plans, including 401(k) accounts, play in helping Americans build wealth for retirement. The tremendous ability of such investment vehicles to help investors get ready for their retirement years can’t be overstated, he said.
Investors held $9.2 trillion in IRA and defined-contribution plans at year-end 2007, which accounted for about half of the entire retirement market, the ICI said. IRA assets rose 12% to $4.7 trillion, with $2.2 trillion of that invested in mutual funds.
Investors held $4.5 trillion in defined-contribution plans, up 8% from the previous year, with mutual funds accounting for $2.4 trillion of that, the ICI found. And $3 trillion was held in 401(k)s at the end of 2007, making them the most popular type of defined-contribution plan.
Lifecycle Funds Popular
Mutual funds managed $4.6 trillion by the end of 2007, or 26% of total retirement market assets, according to the Fact Book. The remaining $13 trillion were managed by pension funds, insurance companies and brokerage firms. That $4.6 trillion in retirement assets managed by mutual funds represents 38% of the $12 trillion managed by funds at year-end 2007, the ICI said.
Lifestyle funds, which are designed to meet risk preferences, and lifecycle funds, which rebalance allocations as investor age, continue to gain in popularity
“One of the reasons is that they provide a very convenient and easy way to get an asset allocation and to have that change over time in a way that’s understandable and intuitive,” said Reid. “They’re a wonderful, sort of one-stop shop for the investor.”
Net new cash flow into these funds reached a record $92 billion in 2007, the ICI said. Assets in lifecycle funds rose 61% to $183 billion, with 88% of those assets held in retirement accounts, according to the report. Assets in lifestyle funds reached $238 billion, of which 45% was held in retirement accounts, the according to the ICI.
Last year’s Fact Book for the first time included sections on closed-end and exchange-traded funds, and the 2008 Fact Book includes sections on each. ETF demand, from both retail and institutional investors, continued to be very strong in 2007, Reid said.
“If you look at mutual funds and ETFs together, they continued to take market share away from direct investment in stocks, bonds and other types of investment vehicles,” he said.
And investors continue to heed the advice of experts on the importance of fees. Assets in 401(k) plans are concentrated in lower-cost funds, the ICI found. For example, more than three-quarters of the 401(k) assets invested in stock funds are invested in funds with expense ratios of less than 1%, according to the 2008 Fact Book.
That’s nothing new, said Reid, noting that investors have been drawn to lower-cost funds since the early 1990s.
