New ICI Research on Mutual Fund Ownership and on the U.S. Retirement Market

Transcription

1 New ICI Research on Mutual Fund Ownership and on the U.S. Retirement Market IDC Webinar November 29, 2012 Sarah Holden Senior Director, Retirement & Investor Research Copyright 2012 by the Investment Company Institute. All rights reserved. Overview: Highlights from Recent ICI Research on Mutual Fund Investing What are the recent trends in mutual fund investing? How many U.S. households own mutual funds? How do mutual fund investors feel about mutual funds and investment risk? 2 1

2 Overview: Highlights from Recent ICI Research on the U.S. Retirement Market What s the thinking around retirement plan coverage and retirement saving? What are the recent developments in DC plan participants activities and U.S. retirement market assets? How has 401(k) plan investing changed over the past decade? What s happening in the U.S. retirement market in policy circles and the press? What are IRA investors up to? 3 What are the recent trends in mutual fund investing? 4 2

3 Mutual Fund Assets by Investment Objective Total net assets, billions of dollars, end-of-period, Equity Hybrid Bond 6,417 Money market 4,887 5,833 4,875 5,599 5,215 5,891 2,027 2,338 3,086 3,641 3,832 2,229 3,316 2,804 2,632 2,884 2,691 3,341 2,551 1,368 1,505 1,692 1, * *2012 data are for September 30, Source: Investment Company Institute (ICI Trends) 5 Long-Term Mutual Fund Flows by Investment Objective Net new cash flow, billions of dollars, * Domestic equity World equity Hybrid Bond * *2012 data are through September 30, Source: Investment Company Institute (ICI Trends) 6 3

4 ETF Assets and Flows Billions of dollars, * Total net assets 1,281 Net issuance 992 1, * * *2012 data are through September 30, Source: Investment Company Institute 7 How many U.S. households own mutual funds? 8 4

5 Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2012 More than 53 million U.S. households, representing more than 90 million individual investors, owned mutual funds in Mutual fund owners reported that investment performance was the most influential of the many factors that shaped their opinions of the fund industry. Mutual funds favorability among shareholders edged down in 2012 as the stock market moved down in April and May 2012 to end up relatively flat compared with May Shareholders willingness to take investment risk remained at the same subdued levels since the 2008 financial crisis Percent of U.S. Households Owned Mutual Funds in 2012 Number and percentage of U.S. households owning mutual funds, selected years Millions of U.S. households owning mutual funds Sources: Investment Company Institute and U.S. Census Bureau (See Schrass, Bogdan, and Holden, "Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2012, ICI Research Perspective (November 2012)) 10 5

6 Characteristics of Mutual Fund Investors, 2012 In 2012, most households that owned mutual funds were headed by individuals in their peak earning and saving years. The majority of mutual fund owners was employed and had moderate household incomes: 72% of individuals heading households owning mutual funds were employed either fullor part-time, and 57% of U.S. households owning mutual funds had incomes between $25,000 and $99,999. Mutual fund owning households often held several funds, and equity funds were the most commonly owned type of mutual fund. Employer-sponsored retirement plans increasingly are the gateway to mutual fund ownership. 11 Employer-Sponsored Retirement Plans Increasingly the Source of First Mutual Fund Purchase Percentage of U.S. households owning mutual funds by year of first fund purchase, 2012 Inside employer-sponsored retirement plan Outside employer-sponsored retirement plan 58% 65% 64% 66% 69% 42% 35% 36% 34% 31% Before to to to or later Year of first mutual fund purchase Source: Investment Company Institute (See Schrass, Bogdan, and Holden, Characteristics of Mutual Fund Investors, 2012, ICI Research Perspective (November 2012)) 12 6

7 How do mutual fund investors feel about mutual funds and investment risk? 13 Mutual Fund Investor Attitudes Tend to Rise and Fall with Stock Market Performance Mutual fund industry favorability rating and S&P 500 index, Mutual fund industry favorability rating 1 S&P 500 index, May average2 1,332 1,418 1,511 1,403 1,270 1,178 1,290 1,108 1,079 1, ,125 1,338 1, The mutual fund industry favorability rating is the percentage of mutual fund shareholders familiar with the fund industry who have a "very" or "somewhat" favorable impression of the industry. 2 The S&P 500 is an index of 500 stocks chosen for market size, liquidity, and industry group representation. Sources: Investment Company Institute and Standard and Poor's (See Schrass, Bogdan, and Holden, "Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2012, ICI Research Perspective (November 2012)) 14 7

8 Households Willingness to Take Investment Risk Percentage of U.S. households by mutual fund ownership status; May 2008, May 2009, May 2010, May 2011, May 2012 Substantial financial risk for substantial financial gain Above-average risk for above-average gain Average risk for average gain Below-average risk for below-average gain Unwilling to take any risk Households owning mutual funds Households not owning mutual funds All U.S. households Source: Investment Company Institute (See Schrass, Bogdan, and Holden, "Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2012, ICI Research Perspective (November 2012)) 15 Mutual Fund Owning Households Willingness to Take Investment Risk Percentage of mutual fund owning households willing to take above-average or substantial investment risk All mutual-fund owning households Source: Investment Company Institute (See Schrass, Bogdan, and Holden, "Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2012, ICI Research Perspective (November 2012)) 16 8

9 Mutual Fund Owning Households Willingness to Take Investment Risk Percentage of mutual fund owning households willing to take above-average or substantial investment risk Younger than to to or older Age of head of household Source: Investment Company Institute (See Schrass, Bogdan, and Holden, "Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2012, ICI Research Perspective (November 2012)) 17 What s the thinking around retirement plan coverage and retirement saving? 18 9

10 Americans Likely to Be Focused on Retirement Savings Have Access to Employer-Provided Plans Most workers who are likely to have the ability to save and to be focused primarily on saving for retirement are covered by employer-provided retirement plans. Workers at small employers that sponsor retirement plans are as likely to participate as workers at large employers sponsoring retirement plans. Differences in workforce composition appear to be a primary cause for the lower rate at which small employers sponsor retirement plans. 19 Link Between Savings Goals and Retirement Plan Coverage Percentage of private-sector wage and salary workers with access to employersponsored retirement plans, % 69% 60% 50% Own employer sponsors plan All workers age Own employer sponsors plan Full-time, full-year workers age Own employer sponsors plan Own employer or spouse's employer sponsors plan Full-time, full-year workers age likely to be focused on saving for retirement* *Full-time, full-year workers who earn $45,000 or more and are aged 30 to 64 or earn $25,750 to $44,999 and are aged 45 to 64. Among full-time, full-year workers aged 35 to 44, $25,750 represents the top earnings of the 20th percentile of annual earnings and $45,000 represents the top earnings for the 50th percentile of annual earnings. Source: Investment Company Institute tabulations of March 2012 Current Population Survey; see Brady and Bogdan (September 2012) 20 10

11 Near-Retiree Households with Retirement Assets and/or Benefits Percentage of households with working head age 55 to 64, by income quintile, excludes top and bottom 1 percent of the income distribution, 2010 DB only Both DB and retirement assets Retirement assets only Bottom Second Middle Fourth Top All ---- Income quintile ---- Source: Investment Company Institute tabulations of Federal Reserve Board Survey of Consumer Finances 21 Retirement Resource Pyramid Other assets IRAs (including rollovers) Employer-sponsored retirement plans Homeownership Social Security 22 11

12 Components of Wealth for Households Approaching Retirement Percentage of wealth by wealth quintile for households with at least one member born between 1948 and 1953; Balance sheet in 2006 Other DC pension + IRA DB pension Net housing wealth Social Security Bottom Second Third Fourth Top ---- Wealth quintile ---- Note: Households with top and bottom 1 percent of wealth were excluded. Source: Investment Company Institute tabulation derived from Gustman, Steinmeier, and Tabatabai (2009) Using Health and Retirement Study (HRS) Data 23 What are the recent developments in DC plan participants activities and U.S. retirement market assets? 24 12

13 ICI Survey of DC Plan Recordkeepers ICI s recordkeeper survey focused on activities in more than 24 million DC accounts during the first half of 2012: DC plan participants generally did not take withdrawals. Participants continued saving in their plans. Most DC plan participants stayed the course with their asset allocations in 2012:H1. After rising in the wake of the economic stresses, loan activity edged back a bit in 2012:Q1 and 2012:Q2. 25 DC Plan Participants Stayed the Course Summary of recordkeeper data; percentage of participants 2009:H1 2010:H1 2011:H1 2012:H1 4.6% 7.7% 7.1% 6.6% 6.4% 9.3% 6.3% 6.0% 4.9% 2.1% 2.1% 2.1% 1.8% 0.9% 0.9% 1.1% 1.1% 1.7% 1.6% 1.6% Took any withdrawal Took hardship withdrawal Stopped contributing Changed asset allocation of account balance Changed asset allocation of contributions Note: The samples include nearly 24 million DC plan participants in 2009:H1, 2010:H1; and 2011:H1, and more than 24 million DC plan participants in 2012:H1. Activity reported covers the first half of each year indicated. Source: ICI Survey of DC Plan Recordkeepers (January June 2009; January June 2010; January June 2011; January June 2012); see Holden and Schrass, Defined Contribution Plan Participants Activities, First Half 2012 (November 2012) 26 13

14 Loan Activity Edged Back a Bit in 2012:Q2 Percentage of participants who had plan loans outstanding; end-of-period EBRI/ICI 401(k) Plan Database 13% ICI Survey of DC Plan Recordkeepers 15% 15% 15% 14% 13% 17% 16% 15% 19% 18% 18.2% 18.5% 17.9% 17.5% 16% 16% 16.5% 15.3% Q1 Q Note: The EBRI/ICI data cover 401(k) plans; the ICI Survey of DC Plan Recordkeepers covers DC plans more generally (although the bulk of DC plans is 401(k) plans). Sources: EBRI/ICI Participant-Directed Retirement Plan Data Collection Project ( ) and ICI Survey of DC Plan Recordkeepers (December 2008 June 2012); see Holden and Schrass, Defined Contribution Plan Participants Activities, First Half 2012 (November 2012) 27 What s Happening with Total Retirement Assets? Total U.S. retirement assets were $18.5 trillion at the end of June 2012, down 2.0% from $18.9 trillion at the end of March. At the end of 2012:Q2: Retirement savings accounted for 36% of all household financial assets in the United States. IRAs held $5.1 trillion, down 2.0% over the second quarter. 46% of IRA assets was invested in mutual funds. DC plans held $4.7 trillion, of which $3.3 trillion was held in 401(k) plans. 57% of DC plan assets was invested in mutual funds. In 2012:Q2, assets in target date mutual funds were up 0.5% from March 2012; 91% of assets in target date mutual funds was held in IRAs (19%) and DC accounts (72%)

15 U.S. Retirement Assets Trillions of dollars, end-of-period, selected dates $10.5 Other Plans IRAs Other DC plans 401(k) plans $18.9 $18.5 $17.8 $17.7 $17.8 $16.6 $16.2 $13.7 $14.1 $8.9 $8.7 $8.7 $8.4 $8.4 $8.3 $7.8 $7.1 $7.0 $5.5 $4.2 $4.7 $4.8 $4.9 $5.2 $5.1 $4.4 $3.3 $3.7 $2.5 $1.3 $1.4 $1.3 $1.4 $1.4 $1.5 $1.4 $1.1 $1.2 $0.9 $1.6 $2.2 $2.8 $3.0 $2.2 $2.7 $3.1 $3.1 $3.4 $ :Q1 2012:Q2 Note: For definitions of plan categories, see Tables 1 and 4 in The U.S. Retirement Market, Second Quarter Some data are estimated. Source: See Investment Company Institute, The U.S. Retirement Market, Second Quarter 2012 (September 2012) 29 Role of Mutual Funds in Defined Contribution Plans and IRAs Billions of dollars, 2012:Q2 $4,707 e $5,126 $2,017 $2,791 $150 $411 $213 $615 $452 57% $479 $1,515 $1,191 46% Other investments Money market funds Bond funds Balanced/Hybrid funds* Equity funds DC plan assets IRA assets *The bulk of lifestyle and target date mutual funds is included in this category. e = Data are estimated. Sources: Investment Company Institute and Federal Reserve (See Investment Company Institute, The U.S. Retirement Market: Second Quarter 2012 (September 2012)) 30 15

16 Target Date Mutual Fund Assets Billions of dollars, end-of-period Other investors IRAs 256 DC plans % :Q1 2011:Q2 2011:Q3 2011:Q4 2012:Q1 2012:Q2 Jul. '12 Aug. '12 Sep. '12 * A target date (lifecycle) fund typically rebalances its portfolio to become less focused on growth and more focused on income as it approaches and passes the target date of the fund, which is usually included in the fund s name. Source: Investment Company Institute 31 Target Date Mutual Funds Draw New Cash Net new cash flow,* billions of dollars 56 Annual Monthly January 2011 September ** Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep *Net new cash flow is the dollar value of new sales minus redemptions, combined with net exchanges. Does not count reinvested dividends or reinvested capital gains. **2012 data are year-to-date through September. Source: Investment Company Institute 32 16

17 How has 401(k) plan investing changed over the past decade? 33 Asset Allocation of 401(k) Plan Participants Before and After the Financial Market Crisis The bulk of 401(k) assets continued to be invested in stocks. On average, at yearend 2010, 62 percent of 401(k) participants assets was invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. At year-end 2010, 70 percent of 401(k) plans included target date funds in their investment lineup. At year-end 2010, 11 percent of the assets in the EBRI/ICI 401(k) database was invested in target date funds and 36 percent of 401(k) participants held target date funds. 401(k) plan participants continued to seek diversification of their investments

18 401(k) Participants Have Tempered Their Account Allocation to Stocks Percentage of 401(k) plan participants by age, 2000 and 2010 Percentage of 401(k) account allocated to equities* >80% 100% >60% 80% >40% 60% >20% 40% 1% 20% Zero 55% 14% 15% 60% 59% 20% 54% 55% 14% 21% 15% 9% 11% 10% 11% 11% 40% 40% 20% 18% s 30s 40s 60s Participant age *Includes stocks held in funds. Source: EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; see Holden, VanDerhei, Alonso, and Bass, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2010, ICI Research Perspective (December 2011) 35 30% 13% 21% 17% Recently Hired Participants in Their Thirties Hold More Target Date and Balanced Assets 401(k) plan average asset allocation among 401(k) participants with two or fewer years of tenure, percent of total Fixed-income* Company stock Equity funds Balanced funds Target date funds Non target date balanced funds 8% 17% 7% 8% 11% 9% 7% 20% 14% 25% 17% 28% 34% 17% 25% 28% 35% 68% 56% 56% 55% 43% 41% 40% 9% 12% 6% 5% 5% 20% 16% 14% 22% 17% 16% 36 5% 5% 4% Recently hired participants in their 30s *Fixed-income investments include bond funds, guaranteed investment contracts (GICs) and other stable value funds, and money funds. Note: Funds include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product primarily invested in the security indicated. Percentages are dollar-weighted averages. Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; see Holden, VanDerhei, Alonso, and Bass, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2010, ICI Research Perspective (December 2011) 18

19 Target Date Funds Claim a Growing Share of 401(k) Market Percentage of total, 2006 and % 70% 62% 68% 36% 19% 5% 11% Plans offering Participants offered Participants holding Target date fund assets Note: Funds include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product primarily invested in the security indicated. Source: EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; see Holden, VanDerhei, Alonso, and Bass 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2010, ICI Research Perspective (December 2011) 37 What s happening in the U.S. retirement market in policy circles and the press? 38 19

20 The Retirement Crisis and a Plan to Solve It The retirement crisis is directly attributable to the breakdown of the traditional three-legged stool of retirement security pensions, savings, and Social Security. Crisis because people have not saved enough and pension coverage is low. Report released July 27th 39 The New York Times: Should the 401(k) Be Reformed or Replaced? September 11, 2012 Letter to the NYT Editor from Paul Schott Stevens, ICI President and CEO The Future of Retirement Is Better 401(k) Plans Op Ed in the San Francisco Chronicle by Paul Schott Stevens, How to Build on the Success of 401(k)s ICI ViewPoints by Paul Schott Stevens, October 1,

21 The Tax Benefits and Revenue Costs of Tax Deferral Individuals ages are typically more important than their marginal tax rates in determining how much they benefit from deferred taxation of compensation contributed to employer-provided retirement plans or IRAs. Tax deferral is roughly equivalent to exempting from tax the investment income earned on retirement contributions. The relationship between marginal tax rates and the tax benefits of deferral is complex. 41 Key Takeaways from The Tax Benefits and Revenue Costs of Tax Deferral Contributions to employer retirement plans (DB & DC) and IRAs are tax deferrals Deferrals are neither deductions nor exclusions Benefits cannot be calculated as: (amount contributed) x (marginal tax rate) Intuition: Benefit of deferral is getting tax-free investment income Length of deferral Rate of return Character of investment income Relationship between tax benefits and marginal tax rates is complex Benefits are not proportional to the marginal tax rate Benefits can be lower for taxpayers with higher marginal tax rates Using realistic assumptions: Little difference in benefits for taxpayers in the top four tax brackets Age typically more important than marginal tax rate 42 21

22 What are IRA investors up to? 43 The IRA Investor Profile: Results from The IRA Investor Database The database contains account-level information from a wide range of financial services firms. The collection covers more than 10 million IRA investors (2007 and 2008) and provides comprehensive coverage of IRA investors across age, income, and gender groups. Series of Reports: Traditional IRA Contribution Activity Traditional IRA Rollover Activity Traditional IRA Asset Allocation Traditional IRA Withdrawal Activity Next Report: Analysis of Roth IRA Investors 44 22

23 The Role of IRAs in U.S. Households Saving for Retirement Nearly 40% of U.S. households owned IRAs in The most commonly owned type of IRA was traditional IRAs:1/3 of U.S. households owned traditional IRAs. Although most U.S. households are eligible to make contributions to IRAs, few do so. IRA withdrawals are infrequent and mostly retirement related. About one-in-five traditional IRA owning households make withdrawals in any given year. Most common withdrawal amount is the required minimum distribution (RMD). Traditional IRA owning households not making withdrawals generally indicate they do not plan to tap their IRAs until age 70½. 45 Traditional IRAs Often Contain Rollovers Percentage of households owning traditional IRAs in or later 2000 to % 1995 to 1999 Traditional IRA owning households with no rollovers 45% Traditional IRA owning households that have made rollovers at some time 55% 22% 1990 to 1994 Before % 7% 3% Traditional IRA owning households with rollovers Source: ICI IRA Owners Survey (See Holden and Schrass, The Role of IRAs in U.S. Households Saving for Retirement, 2011, ICI Research Perspective (November 2011)) 46 23

24 Key Takeaways from Recent ICI Research on Mutual Fund Investing Mutual fund flows are influenced by market performance, but also by changing willingness to take investment risk and aging of the U.S. population. About 44% of U.S. households own mutual funds and many are introduced to mutual fund investing through employer-sponsored retirement plans. Older households express less willingness to take investment risk than younger households. Willingness to take investment risk also varies over time. 47 Key Takeaways from Recent ICI Research on the U.S. Retirement Market Retirement plan savers tend to stay the course. Over the past decade, 401(k) plan participants have reached for diversification. Rather than a three-legged stool, a pyramid is a more accurate depiction of U.S. retirement resources. In policy circles and the press, there are suggestions of ways to reform the U.S. retirement system. It is important to understand that tax deferrals are not the same as tax deductions as policymakers seek to fix our fiscal imbalances

25 References Brady, Peter The Tax Benefits and Revenue Costs of Tax Deferral. Washington, DC: Investment Company Institute (September). and Brady, Peter, and Michael Bogdan Who Gets Pension Plans and Why, ICI Research Perspective (September). and Greenhouse, Steven Should the 401(k) Be Reformed or Replaced? The New York Times (September 11). Gustman, Alan L., Thomas L. Steinmeier, and Nahid Tabatabai What the Stock Market Decline Means for the Financial Security and Retirement Choices of the Near- Retirement Population. Michigan Retirement Research Center Working Paper WP (October). Holden, Sarah, and Steven Bass The IRA Investor Profile: Traditional IRA Investors Withdrawal Activity, 2007 and Washington, DC: Investment Company Institute (July). and 49 References, cont. Holden, Sarah, and Daniel Schrass The Role of IRAs in U.S. Households Saving for Retirement, ICI Research Perspective (November). Holden, Sarah, and Daniel Schrass Defined Contribution Plan Participants Activities, First Half Washington, DC: Investment Company Institute (November). Holden, Sarah, Jack VanDerhei, Luis Alonso, and Steven Bass (k) Plan Asset Allocation, Account Balances, and Loan Activity in ICI Research Perspective and EBRI Issue Brief (December). Investment Company Institute The U.S. Retirement Market, Second Quarter and Investment Company Institute Trends in Mutual Fund Investing September Investment Company Institute Exchange-Traded Fund Data September

26 References, cont. Investment Company Institute. 401(k) Resource Center. Schrass, Daniel, Michael Bogdan, and Sarah Holden Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2012, ICI Research Perspective (November). Schrass, Daniel, Michael Bogdan, and Sarah Holden Characteristics of Mutual Fund Investors, 2012, ICI Research Perspective (November). Stevens, Paul Schott (k) Plans: Key in Helping Americans Achieve Secure Retirement. ICI Viewpoints (September 19). Stevens, Paul Schott The key to retirement is better 401(k) plans. Op Ed in San Francisco Chronicle (September 24). U.S. Senate Committee on Health, Education, Labor, and Pensions The Retirement Crisis and a Plan to Solve It. Washington, DC: Senator Tom Harkin, Chairman U.S. Senate Committee on Health, Education, Labor, and Pensions (July) QUESTIONS & ANSWERS 52 26