Young Workers, Small Balances, and ‘Extreme’ IRA Allocations

Young Workers, Small Balances, and ‘Extreme’ IRA Allocations
November 5, 2013

Young workers with small balances and owners of Roth individual retirement accounts (IRAs) are more likely than other IRA owners to make "extreme" allocations to stocks or money, according to a new report from the nonpartisan Employee Benefit Research Institute (EBRI).

The EBRI report, which defines "extreme" allocations as having less than 10 percent or more than 90 percent in a particular asset category in an account, found:

  • By age, the youngest (younger than age 25) IRA owners had the highest percentage, with more than 90 percent in equities (37.5 percent). Above age 25, the percentage with more than 90 percent in money/cash equivalent funds decreased with age. However, the percentage of IRA owners above 25 with more than 90 percent invested in bonds and money combined decreased as the owner’s age increased until age 75.
  • By type, Roth and traditional IRAs established by contributions were more likely to have greater than 90 percent invested in equities and least likely to have more than 90 percent invested in money/cash equivalent funds In contrast, traditional IRAs established by rollovers, and SEP/SIMPLE IRAs were much more likely to have 10 percent or less invested in equities and 90 percent or more invested in money/cash equivalent funds
  • By account balance, IRA owners with higher account balances generally were less likely to have extreme asset allocations. For example, while 37.2 percent of those with account balances of $10,000?$24,999 had 90 percent or more of their assets invested in equities, only about 1 in 10 of those with account balances of $250,000 or more did.
  • By gender, there was very little difference by gender: About 29 percent of females and 28 percent of males had 90 percent or more of their IRA assets invested in equities. Similarly, 62 percent of females and about 65 percent of males had less than 10 percent invested in bonds.

 The EBRI notes IRAs are a vital component of U.S. retirement savings, representing more than 25 percent of all retirement assets in the nation. A substantial portion of these IRA assets originated in other tax-qualified retirement plans, such as defined benefit (pension) and 401(k) plans, and were subsequently moved to IRAs through rollovers.

These and other findings from the latest update of the EBRI IRA Database, "IRA Asset Allocation, 2011," are published in the October EBRI Notes, online at www.ebri.org

Source: Employee Benefit Research Institute