IRA Retirement Contributions Sputter

July 30, 2010— -- A new study that looked at 6 million holders of traditional Individual Retirement Accounts has found the vast majority aren't making any contributions, prompting some retirement experts to sound a warning bell about a looming crisis.

The Washington, D.C.-based Investment Company Institute, using data from 2007 and 2008, found that only 11 percent of IRA investors made contributions in 2007. Even fewer investors, just 9.4 percent, made contributions in 2008.

"The ICI study reveals a symptom of a larger problem, and that is as a country we're not saving enough for retirement," said Doug Orton, an associate vice president in the retirement services practice of Boston-based MFS Investment Management. "Individuals are not saving enough. Local governments that sponsor defined benefit plans aren't putting enough aside. Social Security is underfunded. There has to be a wake-up call at some point. Most people have no idea what they even need to retire."

401k Precedence

Sarah Holden, coauthor of the study and the ICI's senior director of retirement and investor research, stressed a number of factors that help explain the low level of IRA contributions among people with active accounts.

According to Holden:

*Other ICI survey information indicates roughly two-thirds of traditional IRA-owning households also have some form of defined contribution plan, mainly 401k plans, in which they may be actively participating. "A lot of people use the IRA purely as a place to park rollover assets from a retirement plan at a former employer," Holden said.

*The 2007-08 period examined also happened to be a difficult time for the economy and the stock market.

*Confusion over IRA rules may prevent people from participating. For example, people aged 50 or older could contribute up to $5,000 to a traditional IRA in 2007; in 2008, because contribution rules are pegged to inflation adjustments, someone 50 or older could put in up to $6,000. Additionally, rules over what portion of contributions are tax deductible are tricky, and can vary, depending on a person's income, marital status, and on whether they also participate in an employer-sponsored retirement plan.

Income Traps

David Wray, president of the Profit Sharing/401k Council of America, said the ICI study confirms a historical trend that most retirement industry members already knew.

"Different studies over the years, albeit not as definitive as the ICI's, have pegged the contribution levels at around 10 percent," Wray said, adding this trend held even in the late 1990s when the economy and stock market were booming.

"First of all, you have to keep in mind that people making over $63,000 and in a retirement plan are restricted from making tax-deferred IRA contributions," Wray said. "A very high percentage of those people in that income bracket are in retirement plans."

However, Wray added, most American workers make less than $63,000 a year.

"Historically this group has low interaction with financial services except for checking and savings accounts," he said. "As a group they have never been savers in IRAs. Why? They have less disposable income and long term saving requires tangible sacrifice. They are also more likely to be intimidated by the financial system and the decisions investing requires. They enter the workforce totally unprepared. They are also less trusting of the system."

Taking Control

Ken Hevert, vice president at Fidelity Investments, said the Boston-based mutual fund giant is seeing signals within its universe of investors indicating more Americans are getting serious about retirement planning. In an annual survey, Fidelity asks 1,000 individuals about their financial goals and resolutions. Looking at 2009 compared with the prior year, 23 percent more respondents indicated an intention to make some form of financial resolution, with 70 percent citing a desire to take "more control of" and "feel more confident about" their fiscal situation.

"I think the financial crisis really shook people up and made them aware of the fact that they need to take more responsibility for their retirement," Hevert said.

He also pointed out that within Fidelity's universe of IRA investors there are greater levels of contributions than what the ICI study suggests. Fidelity manages some 6 million retail retirement accounts, including traditional IRAs. While Hevert, citing proprietary data, wouldn't specify what percentage of Fidelity IRA investors made contributions, he insisted that the rate is notably higher than the mere 1 in 10 that the ICI found. Hevert also pointed out that a recent Fidelity study looking at the first four months of 2010 showed that average IRA contribution amounts increased around 9 percent, up to nearly $3,700, compared to the same period in 2009.

The ICI's Holden said one of the things she found surprising in conducting the IRA study was the sheer persistence of those who do make contributions. Some 63 percent of those people who did make contributions in 2007 did so again in 2008, and more than half knew to take advantage of the higher limits.