Deemed IRAs can help draw more assets to a defined contribution plan and increase the likelihood that rollover assets will not migrate to a different firm, according to a new study from Financial Research Corp.
"A Wealth of Benefits: The Deemed IRA Opportunity" estimates that plans can draw in an extra 10% to 15% from plan participants. While some reports have stressed the value of retaining rollover assets, FRC concluded that the asset-accumulation benefits of Deemed IRAs are much more salient.
Deemed, or "sidecar," IRAs allow employees who have maxed out their defined contribution plans to invest up to $3,000 annually in a traditional or Roth IRA (see MFMN, Dec. 2, 2002). Employers were able to establish Deemed IRAs beginning Jan. 1 this year.
These added assets are clearly good for plan administrators and investment managers, but they also benefit plan sponsors and participants because they help bring down fees through breakpoints. Even so, not every plan is a good candidate, the study concluded, because of the increased costs associated with offering the extra retirement savings program.
"Plan sponsors and recordkeepers that are considering a deemed IRA offering will need to examine a number of attributes in order to determine the products viability for a particular plan," said Chris Brown, VP and author of the study.
Employees need to fit certain profiles for income and IRA compatibility, and plans must be of a certain size and participant turnover, to benefit from the Deemed IRA. The study concluded that it will best come into play with middle-income participants, rather than more highly compensated employees. Also, larger plans will reap more benefits from the Deemed IRA because they already have achieved scale.