The twin gorillas of the roughly $30 trillion U.S. retirement market are individual retirement accounts and 401(k)s. But millions of Americans lost extra money last year on one of those options.
On average, investors with IRAs suffered proportionally larger decreases in their account balances compared to people with employer-sponsored retirement plans, data in a new
The discrepancy between the two tax-advantaged savings vehicles signals how in a down market like 2022, IRAs can be riskier compared to 401(k)s — and easier to raid in a financial pinch.
An IRA owner choose her account's underlying stocks, bonds and funds, sometimes with the help of a financial advisor. By contrast, a saver in a 401(k) is limited to a fixed menu of investment options offered by the investment firm, like Fidelity or Vanguard, that's hired by the company sponsoring his plan.
Put differently, IRA owners take a DIY approach to building a long-term nest egg, while 401(k) owners rely on investment managers to sort winners from losers. IRA investors are their own watchdogs, while a company sponsoring a 401(k) is held to a fiduciary duty to put a customer's best interest first and avoid any conflicts of interest.
Traditional IRAs are funded with pre-tax dollars, with taxes paid at ordinary rates on withdrawals. By contrast, Roths are stuffed with dollars on which taxes have already been paid and have tax-free withdrawals.
Three-pointer
Savers with 401(k)s also suffered losses, but they weren't as steep in terms of percentage points. The average size of an employer-sponsored account last Dec. 31 was $103,900, 20.5% lower than in 2021 when it was $130,700. It's a discrepancy of nearly three percentage points when compared with IRAs.
Scott Bishop, the executive director of wealth solutions at
"Thus, 401(k)s mitigate some risks," Bishop said.
He added that employer-sponsored plans tend to invest in diversified mutual, index and target-date funds, not single stocks, as some IRA owners do. And 401(k)s are monitored by plan trustees with a fiduciary responsibility to savers. Last but not least, Bishop said that amid persistent inflation, "many" investors have "accessed their IRAs to make ends meet," a tapping that reduced account balances.
The Fidelity report didn't indicate if the results include the impact of fees.
Savers in plans with up to 50 participants and less than $500,000 in assets paid an average 2.19% for investment management and recordkeeping in 2022, according to the latest "
Whopper IRAs = smaller balance declines
Intriguingly, there's another discrepancy, and it's much larger. The median IRA balance— the point between the biggest and smallest accounts — fell far less last year, only 15.4%, Fidelity said. That's nearly 10 percentage points less than the average balance decline.
In an era of million- and sometimes billion-dollar Roth IRAs, the median figure could point to the ability of owners of outsize IRAs to make more lucrative investment decisions for their accounts.
Both traditional IRAs and tax-free Roth IRAs bled money as stocks and bonds had a horrible 2022. The S&P 500 index shed 19.4% last year, the most since 2008. Unusually, bonds also had a horrible run, with Bloomberg's U.S. Aggregate Bond Index, a widely followed benchmark of investment-grade and corporate bonds,
Equities and fixed-income securities usually move in opposite directions. Many individual stocks and funds fell much more than the benchmarks.
That IRAs
That year, the average IRA balance rose 9.9% to $128,100 compared to the prior year, according to Fidelity. In contrast, the average 401(k) balance rose a lesser 7.5% to $115,400, according to Fidelity.
Fidelity's analysis of 2022 focused on contribution rates, not on the differences between IRAs and employer-sponsored plans. The Boston-based fund giant and custodian looked at 10.6 million owners of 13.6 million IRA accounts and 22 million participants in 401(k)s for 24,500 companies for which it was custodian last year.
Among 401(k) savers that boosted their contribution rates, the average increase was 2.6%. Fidelity didn't indicate overall IRA contribution increases but said that "across generations, Roths tend to be the retail retirement savings vehicle of choice," with just over 6 in 10 of all retirement plan contributions going to a Roth IRA last year.
"Given all the stresses in the world today, such as natural disasters and geo-political events, Americans continue to confront challenging times in our economy,"
IRAs rule
IRAs are the dominant form of saving for retirement. Nearly 42% of American households had an IRA as of mid-2022,
By contrast, just over 1 in 3 working Americans, or
In recent years, owners of IRAs tended to be older. Fewer than 1 in 5 working-age individuals (ages 15-64) have an IRA versus just over 1 in 3 with a 401(k),
That is changing, as much younger people embrace the savings vehicles. IRA accounts held at Fidelity topped 13.6 million last year, a more than 10% increase on 2021. Members of Generation Z, born between 1997 and 2012, opened 71% more accounts last year compared to the prior year. Accounts for millennials, born between 1981 and 1996, increased 22%.
