Overlap of Retirement Products in U.S. Households MacroMonitor Marketing Report Vol. V, No. 2 March 2001

The number of different retirement products within a given household is increasing. Several factors explain this change: The number of different types of IRAs—traditional, Roth, education, and simple—is increasing. The increased mobility of the job force means that people change employers more often than they once did. The lack of portability among different retirement products necessitates a choice between leaving retirement assets at a previous employer and creating a rollover IRA. Even without the introduction of more legislative changes, this situation is becoming worse: Households have an ever-expanding number of retirement products to manage.

Retirement Product Overlap
(Percent of Household Penetration)

Retirement Product Overlap (Percent of Household Penetration)

The burden of managing multiple accounts falls primarily on consumers. While consumers are in the asset-accumulation phase, this burden may not be excessive. However, once consumers reach the age where they must disburse these assets, the complications become much greater. Add into the mixture the very real possibility—because of an extended life expectancy—of cycling in and out of employment situations, and the complexities become mind-boggling.

This situation needs some major simplification. The recent IRS ruling that lengthens the life expectancy tables that people use to calculate how much of their assets to take out of their IRAs (along with the added flexibility for naming beneficiaries) is a move in the right direction. But it is only a small step. Universal portability and simple, straightforward rules for contribution maximums and deductibility are essential. Flexibility and sufficient diversity of investment options are other basic requirements. After all, the real benefit of lowering risk comes from diversification into different types of investments, not increasing the number of accounts or institutions.

No one would argue with the overall objective of encouraging consumers to save more. Typically, consumers select retirement as the number one objective for why they are saving and investing. The overall incidence of households having at least one tax-deferred retirement vehicle continues to climb, from 61.8% in 1996 to 62.6% in 1998 and 65% in 2000. Given the slow growth of the recently introduced Roth IRA, now owned by 7.7% of all households and the Education IRA, now at 0.7%, and given the variety of SRPs, annuities, and Keoghs, arguably enough types of tax-deferred vehicles are available to consumers.

Among all the annuities, Keoghs, IRAs, pensions, and salary-reduction plans are plenty of choices available to consumers. It is not clear what adding another product or variation to the mix will do to encourage consumers to save more. However, elimination or minimization of any of the barriers to entry or the friction from transaction costs (putting in funds, transferring funds, consolidation, or disbursement) would result in more efficiency in the market and better decisions by market participants. (These barriers and costs include more than simply financial aspects; they involve awareness, information, and education about what is appropriate.)

Consumers have managed to increase the amount they have in tax-deferred retirement accounts: The average amount in all of a household's accounts is now $86,000. Some of this growth is attributable to capital gains, some to the regular payments of SRPs, and some to growing numbers of households in the preretirement life stage. Imagine how much more households could accumulate with a simpler, more flexible system. The difference could have a significant impact on consumers' ability to retire comfortably. Until universal portability and simplification become reality, the drag on consumer saving for retirement will remain considerable.