retirement savings assets enjoyed robust growth between 2003 and
2007 thanks primarily to high investment returns. However, in a
retirement savings market in which equity mutual funds are the key
growth determinant, 2008 has the makings of a very lean
Assets in US retirement plans benefited from positive equity and
bond market returns of 5.5 percent and 7.2 percent, respectively,
during 2007 and ended the year at a record $17.6 trillion, reveals
research conducted by industry body the Investment Company
Institute (ICI). However, asset growth of 6.7 percent in 2007 was
slightly below a CAGR of 7 percent achieved during the preceding
nine years during which total equity returns ranged from -22.1
percent to 33.4 percent , bond returns from -0.8 percent to 11.6
percent and retirement asset growth followed in volatile
Individual retirement accounts (IRA) reflected an 11.9 percent
increase in assets to $4.75 trillion and remained the most
significant class of retirement savings vehicle accounting for 27
percent of US retirement market assets at the end of 2007. IRA’s
were followed by employer sponsored defined contribution (DC) plans
which housed total assets of $4.47 trillion or 25 percent of total
retirement market assets. Assets in private defined benefit plans
remained unchanged at $2.4 trillion and represented 14 percent of
total retirement market assets compared with 20 percent ten years
Emphasising the significance of IRAs the ICI noted that in mid-2007
46.2 million, or 39.8 percent of US households owned IRAs of which
employer-sponsored IRAs accounted for 20 percent of household
Mutual funds’ big role
Mutual funds are a significant investment vehicle for retirement
savers, and in 2007 managed $4.54 trillion in retirement assets
about evenly split between IRAs ($2.24 trillion) and
employer-sponsored DC plans ($2.34 trillion). In addition, US
households owned another $1 trillion in mutual fund assets via
variable life insurance products – primarily variable annuity
contracts – held outside of retirement accounts.
The second most important destination for IRA assets is securities
held in brokerage accounts. At the end of 2007 these accounted for
$1.83 trillion, or 38 percent of total IRA assets.
In the IRA arena life insurance products play a modest role and in
2007 accounted for only $336 billion or 7.2 percent of total IRA
This share has remained stable since 1990 with the exception of the
1999 to 2002 period when equity market weakness saw life insurance
lift its share of IRA assets to a peak of 11 percent in 2002.
During the same period the share of mutual funds fell from 47
percent to 41 percent.
Strong annuity demand
Of significance for insurers in 2007 was strong demand for
annuities which enjoyed the highest growth rate of any retirement
savings asset: 13.3 percent to $1.7 trillion.
This was well above the CAGR of 8.8 percent in annuity assets
recorded during the previous nine years and increased annuities’
share of total retirement market assets from 9 percent in 2006 to
9.7 percent. This was also the highest level since 2002 when
annuities accounted for 9.4 percent of retirement market assets.
The market share of annuities excludes annuities held in IRAs and
DC retirement plans.
According to insurance company association LIMRA variable annuities
accounted for 74 percent of total annuity assets at the end of
2007, fixed annuities 20 percent and indexed annuities 6
At the market’s mercy
How retirement plan assets will have fared by the end of 2008
remains to be seen. However, indications are that it will not be a
year of growth. The S&P 500 equity index had, as at 8 August
this year, delivered a negative total return of 10.6 percent,
according to asset managers Vanguard. On the bond investment front
the Lehman US Aggregate Bond Index reflected a total return of only
1.04 percent in the first seven months of 2008.
The index is the broadest measure of investment grade bonds and
includes Treasury, corporate, asset- backed and international
dollar-denominated bonds, all with maturities over 12 months.
Indicative of the sensitivity retirement savings assets have to
equity and bond returns, the ICI’s study revealed that of a total
of $4.6 trillion invested in DC pension plans and IRAs, $3.1
trillion (68 percent) was held in equity mutual funds at the end of
2007. Funds that invest in a mix of equity and bonds had assets of
$695 billion, bond funds $408 billion and money market funds $360