Americans Now Have More Money in IRAs Than 401(k)s - Why That Leaves Workers More Vulnerable

Many people may be surprised to learn there is a larger share of money in IRA retirement plans than in 401(k)s. This might seem like progress because it shows an increase in Americans' overall retirement savings.

However, there are drawbacks to having the majority of retirement funds in IRAs rather than 401(k)s. Namely, IRAs require more personal responsibility and lack many of the protections that 401(k)s have. Here is more information about this newly released data and what this trend implies about the overall state of retirement investments.

The data: Americans have twice as much money invested in IRAs as in 401(k)s

According to recent data from the Investment Company Institute, nearly $19 trillion is collectively held in IRA accounts. This is nearly twice the amount invested in 401(k) accounts, which total $10 trillion.

IRAs are tax-advantaged retirement accounts, just like 401(k)s. However, IRAs are self-managed, which can make it more challenging for the average American to monitor and grow them. With employer-sponsored 401(k) plans, workers choose from pre-selected assets. With IRAs, workers have to do their own research to choose retirement funds, which can be challenging and confusing for those without general investing knowledge.

High IRA balances are from rollovers, not an investing surge

While it might seem that this IRA balance is due to increased retirement savings, most of the IRA money in this data comes from 401(k) rollovers. There is an increasing number of workers who roll 401(k) funds into IRAs after leaving the workforce or switching jobs.

Sometimes, workers will roll these over into an IRA to save on future taxes. That's because Roth IRAs are taxed now, so that eligible retirees can withdraw the money tax-free in the future. However, not all workers can take advantage of these tax savings and are merely moving their accounts from a 401(k) to a traditional IRA.

401(k)s offer more opportunities for savings than IRAs

One reason 401(k)s may be better for employees overall is that they offer more opportunities to save and invest. Because there is an automatic payroll deduction, employees invest in their 401(k) retirement accounts without having to think about it. Additionally, self-managed IRAs do not offer employer matching contributions that most 401(k)s do through a workplace plan.

401(k)s have built-in protections that IRAs don't

Most importantly, 401(k)s have built-in legal protections under the Employee Retirement Income Security Act (ERISA). This act requires that 401(k) plan providers have fiduciary responsibility. That means they are required by law to select funds that are in the best interests of employees. IRAs do not have the same level of protection. In fact, people are fully responsible for selecting their own IRA funds. If they are not experienced investors, people risk selecting funds that might not be in their best interest.

The problem is that when workers have to self-direct retirement contributions

According to ICI data, 37% of IRA holders were making active contributions. That means that a large percentage of people are not actively adding to their IRA accounts. Some brokerage firms do allow people to set up automatic deposits and automate investment purchases. However, it is not as streamlined as having 401(k) contributions automatically deducted from a paycheck.

Low-income workers are disproportionately affected by 401(k) access

Low-income, part-time, and minority workers are disproportionately affected by 401(k) access. Small-business employees often lack access to 401(k)s as well. These types of workers rely on IRAs as their primary retirement investment vehicle. That means many workers lack the built-in support systems and legal protections that workers with access to IRAs have.

There are benefits to both accounts, but also drawbacks that hurt workers

As mentioned, IRAs do have advantages. Roth IRAs in particular have tax advantages during retirement. However, the actual structure of IRAs does not offer the same level of protection as 401(k) plans. Additionally, it places the burden on workers to understand the complexities of these retirement plans without the support of a human resources department.

Bottom line

This new data showing how much retirement investments are concentrated in IRAs says more about the employment system as a whole than about the investment or savings rate. The increase in IRA balances indicates that workers are changing jobs more frequently. Because of that, their wealth is concentrated in accounts that they have to manage actively.

While IRAs do offer some benefits, they don't have the fiduciary oversight that 401(k)s do. Additionally, for many part-time workers and marginalized individuals, the possibility of a stress-free retirement is less likely without access to 401(k) retirement plans.

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