IRAs Don't Do What They Are Supposed to Do, Study Finds

By Lauren WeberFeaturesDow Jones Newswires

More than 40 years after Congress created individual retirement accounts, a new analysis finds the savings plans aren't fulfilling their mission.

IRAs were intended to give workers without employer-sponsored programs -- typically those who work in small businesses or are self-employed -- access to tax-advantaged retirement savings plans. But most of the $7.8 trillion parked inside IRAs as of 2016's third quarter came from rollovers of employer-sponsored 401(k) accounts, according to an analysis of Internal Revenue Service data by the Center for Retirement Research at Boston College.

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Moreover, most IRA contributors also participate in a 401(k) plan at the same time, the center says.

IRAs do little to encourage active saving by the workers for which they were designed, said Anqi Chen, a research associate at the center and co-author, with Alicia Munnell, of the new paper analyzing IRAs.

"People are using IRAs mainly as a receptacle for transfers from employer plans or to supplement employer plans," Ms. Chen said.

Since many workers don't want to leave their money in an account administered by a former employer, and it is time-consuming to move the savings into a new employer's 401(k) program, workers often roll those funds into an IRA.

Of the 14% of Americans who put money into IRAs in 2011, the most recent year with data available, 53% had a 401(k) plan at the same time, the researchers found. The IRA contributors had average household earnings of $110,000 and were likely to be white, married and college-educated.

IRAs are barely serving lower-income families who may have some money to save and could benefit from the tax advantages of the accounts, the authors found, based on their analysis of census data.

There are two types of IRAs, traditional and Roth, which respectively allow Americans to make tax-deductible contributions to an investment account or allow after-tax savings to grow tax-free. The tax advantages of IRAs phase out for high-earning people.

The authors recommend that federal or state governments return IRAs to their original mission by automatically enrolling workers in the accounts if they don't have access to employer savings programs. Workers currently must select a broker, such as Vanguard Group or Fidelity Investments, and open an account on their own if they want an IRA.

Since 2012, five states -- California, Connecticut, Illinois, Maryland and Oregon -- have passed automatic-enrollment laws, though none of their programs have started.

Oregon will pilot a plan this summer requiring businesses that don't offer pension or 401(k) plans to enroll employees automatically in IRAs. The program simply sets up the account; all contributions would still come from workers.

Write to Lauren Weber at

(END) Dow Jones Newswires

May 02, 2017 07:14 ET (11:14 GMT)