Individual Retirement Accounts Research Articles

Does a requirement to offer retirement plans help low‐income workers save for retirement? Early evidence from the OregonSaves program

AbstractThis study examines the first implementation of the state‐run retirement savings program in Oregon, known as OregonSaves, in 2017. It offers early insights into the substantial impact of this mandated program on retirement savings among previously uncovered private workers. Results from difference‐in‐difference models using SIPP data indicate a 12 percent increase in Individual Retirement Account (IRA) ownership among Oregon workers after the program's roll‐out. Notably, the study discerns significant gains for lower‐income, single, and older workers, as well as workers of small‐size firms who previously lacked retirement savings plan coverage. Findings also suggest additional savings resulting from the mandate.

The effect of required minimum distributions on intergenerational transfers

Tax policy may influence intergenerational transfers, especially the method and timing of gifts. In this paper, I study how tax rules that mandate the decumulation of retirement savings accounts impact transfers from parents to children. Using data from the Health and Retirement Study and a regression discontinuity design, I estimate the causal effects of aging into Required Minimum Distribution (RMD) regulations, which mandate withdrawals from retirement accounts upon reaching a specified age. First, I establish the effects of RMDs on asset decumulation in my setting and show a sharp increase in withdrawals from Individual Retirement Accounts (IRAs). Next, I provide new evidence on the effects of RMDs on intergenerational transfers and show a concurrent, discontinuous increase in inter vivos gifts. The results indicate that some households ultimately use IRAs to facilitate within-family transfers, holding wealth in the tax-advantaged accounts until required to take distributions and then passing resources to children.

Optimal performance of a tontine overlay subject to withdrawal constraints

AbstractWe consider the holder of an individual tontine retirement account, with maximum and minimum withdrawal amounts (per year) specified. The tontine account holder initiates the account at age 65 and earns mortality credits while alive, but forfeits all wealth in the account upon death. The holder wants to maximize total withdrawals and minimize expected shortfall at the end of the retirement horizon of 30 years (i.e., it is assumed that the holder survives to age 95). The holder controls the amount withdrawn each year and the fraction of the retirement portfolio invested in stocks and bonds. The optimal controls are determined based on a parametric model fitted to almost a century of market data. The optimal control algorithm is based on dynamic programming and the solution of a partial integro differential equation (PIDE) using Fourier methods. The optimal strategy (based on the parametric model) is tested out of sample using stationary block bootstrap resampling of the historical data. In terms of an expected total withdrawal, expected shortfall (EW-ES) efficient frontier, the tontine overlay dramatically outperforms an optimal strategy (without the tontine overlay), which in turn outperforms a constant weight strategy with withdrawals based on the ubiquitous four per cent rule.

Pros and cons of remaining in a 401(k) plan after retirement


 
 
 This paper examines whether retirees would benefit from staying in their companies’ 401(k) plans after retirement, versus rolling their savings over to Individual Retirement Accounts (IRAs). Our focus is on individuals having low or moderate levels of financial literacy. We conclude that many such retirees would likely find it financially rewarding to retain their assets in their 401(k) plans. While IRAs currently offer a wider range of advice or distribution options compared with 401(k) plans, we close by pointing to legislative and technological developments that may produce better outcomes, more retirement confidence, and greater security for retirees.
 
 

"I'm Not Good with Money" and Other Lies Residents Tell Themselves about Personal Finance.

Some physicians believe that they have difficulty managing their own personal finances, and many medical schools and residences do not have formal financial curricula embedded in education. Given that many medical students have >$200,000 in school loans, physicians are expected to navigate the complex financial world without guidance. In this article, the authors developed a personal finance curriculum for Internal Medicine residents with the aim of evaluating the proportion of residents engaging in active personal finance activities, increasing their knowledge of financial literacy and their comfort with personal finance concepts using a pre- and postintervention survey. The content of the curriculum included four modules structured around different financial themes and delivered to trainees in 45-minute sessions. A majority of the residents were able to participate in workplace retirement, log into their retirement account, possessed a Roth individual retirement account, manage a budget, and check their credit score. An area prompting concern postintervention was the level of discomfort engaging with personal finance that disproportionally affected the female trainees more than their male counterparts. It is likely that an individual's comfort level managing finances stems from money beliefs, rather than actual ability given the requirements to graduate from medical school and the demands of an Internal Medicine residency.

Set it and forget it? Financing retirement in an age of defaults

Retirement savings abandonment is a rising concern connected to defined contribution systems and default enrollment. We use tax data on Individual Retirement Accounts (IRAs) to establish that for a recent cohort, 0.4% of retirement-age individuals abandoned an aggregate of $66 million, proxied by a failure to claim over ten years after a legal requirement to do so. Analysis of state unclaimed property databases suggests that workplace defined contribution plans are abandoned at a higher rate than IRAs. Finally, regression discontinuity estimates show that certain accounts created by default enrollment are at higher risk of abandonment by passive savers.

State-based retirement plans: why or why not

Many Americans are financially unprepared for retirement. To address this issue, some states have proposed and/or passed legislation to implement statebased, automatic individual retirement account (IRA) plans. With only five states passing legislation, we discuss some of the program design considerations, with a focus on how decisions regarding these considerations impact participation and cost and, ultimately, the feasibility of state-based retirement plans. Next, we analyze the characteristics of the states that have proposed legislation related to state-based retirement programs and those that have not to determine if there are any systematic differences. We also conduct similar comparisons of those states that have successfully passed legislation and those that have proposed but not yet passed state-based retirement plan legislation.

Valuing Losses of Pension Benefits

Valuing Losses of Pension Benefits

Welfare effects of automatic‐IRAs

AbstractSeveral states require employers who do not offer retirement benefits to automatically enroll their employees in individual retirement accounts (IRAs). We quantify the welfare effects of this program for individuals who follow a rule‐of‐thumb to make savings decisions. We find workers who save more than 3% would be willing to give up 0%–1.4% of lifetime consumption to avoid an IRA. We also consider a fully rational model with credit frictions, stochastic income and pre‐retirement withdrawals, and costly IRA opt‐outs. We find that being enrolled in an IRA is most likely to benefit workers who do not borrow during the life‐cycle.

Temporary and permanent effects of withdrawal penalties on retirement savings accounts✩

We investigate the impact of the early withdrawal penalty on Individual Retirement Account (IRA) withdrawals by examining behavior in a short window before and after the age when the penalty is lifted. We find a large, sudden increase in withdrawals after the penalty’s expiration of 3–3.5 times the baseline level, with no evidence of anticipatory behavior. After one month, average withdrawals decline to and persist at approximately double the baseline. We find that the short-run increase is more pronounced when liquidity constraints are more likely to have been binding. Finally, we explore the implications of our results for policies that adjust the age at which early penalties expire or policies that temporarily remove such penalties.

Gender Differences in Risk-Taking Investment Strategies in Defined Contribution Plans

We study gender differences in risk-taking investment strategies in Defined Contribution (DC) Plans with the help of data from the US Federal Reserve Board’s Survey of Consumer Finances (SCF). By DC plans, we refer not only to employer-sponsored plans such as 401(k)s and 403(b)s, but also to Individual Retirement Accounts (IRAs) and Roth and Keogh accounts. We suggest our own split of the SCF DC plans into risk-free and risky ones, and we build risky shares of total DC plans. We compare the risky shares of females and males in two different settings. In the first setting, we work with two samples of single people, and in the second setting we work with an extended SCF sample. In both settings, we conclude that there are no significant differences in the risky shares of total DC plans between (single) women and (single) men but that there are significant gender differences in risky IRAs and 401(k)s between (single) women and (single) men. We conclude with policy implications.

Present Bias Causes and Then Dissipates Auto-Enrollment Savings Effects

Present bias causes procrastination, which leads households to stick with auto-enrollment defaults. However, present bias also engenders overconsumption. Separation from each employer generates a rollover of 401(k) balances to an individual retirement account (IRA) that is more liquid than the 401(k) account. Households with sufficient present bias will partially or fully deplete these rollover IRAs before retirement. Present-biased agents may be whipsawed by auto-enrollment. They follow their employer's default while still employed and then spend some or all of the new savings shortly after they separate from each employer.

Cancer's Lasting Financial Burden: Evidence From a Longitudinal Assessment.

The purpose of this study was to conduct a longitudinal analysis of out-of-pocket expenditure (OOPE) trajectories for the assessment of cancer's lasting financial impact. We identified newly diagnosed cancer patients and constructed matched control group of noncancer participants from the 2002-2018 Health and Retirement Study. Outcomes included monthly OOPE for prescription drugs (RX-OOPE_MONTHLY) and OOPE for medical services other than drugs in the past 2 years (non-RX-OOPE_2YR), consumer debt, and new individual retirement account (IRA) withdrawals. Generalized linear models were used to compare OOPEs between cancer and matched control groups. Logistic regressions were used to compare household-level consumer debt or early IRA withdrawal. Subgroup analysis stratified patients by age, health status, and household income, with the low-income group stratified by Medicaid coverage. All statistical tests were 2-sided. The study cohort included 2022 cancer patients and 10 110 participants in the matched noncancer control group. Mean non-RX-OOPE_2YR of cancer patients was similar to that of participants in the matched control group before diagnosis but statistically significantly higher at diagnosis ($1157, P < .001), 2 ($511, P < .001) years, 4 ($360, P = .006) years, and 6 ($430, P = .01) years after diagnosis. A similar pattern was observed in RX-OOPE_MONTHLY. A statistically significantly higher proportion of cancer patients incurred consumer debt at diagnosis (34.5% vs 29.9%; P < .001) and 2 years after (32.5% vs 28.2%; P = .002). There was no statistically significant difference in new IRA withdrawals. Patients experienced lasting financial consequences following cancer diagnosis that were most pronounced among patients aged 65 years and older, in good-to-excellent health at baseline, and with low income, but without Medicaid coverage. Policies to reduce costs and expand insurance coverage options while reducing cost-sharing are needed.

Retirement Income Sources and Subjective Financial Well-Being: A Comparison of Retirees and Non-Retirees

This study examined whether retirement income sources matter for the subjective financial well-being of retirees and the subjective retirement savings adequacy of non-retirees. Using nationally representative data from the 2017 Survey of Household Economics and Decisionmaking, the study found that while income from a defined benefit (DB) plan, defined contribution (DC) plan, and an individual retirement account (IRA) were positively related to the subjective financial well-being of retirees, income from employment and family were negatively related to their subjective financial well-being. Also, retirement preparation with a DB, DC, and IRA was positively related to subjective retirement savings adequacy for non-retirees. The moderating role of age in the relationship between the form of retirement savings for non-retirees and their subjective retirement savings adequacy was significant. Because of the growing importance of individual responsibility for retirement planning, the present study adds to the financial planning knowledge of financial practitioners, educators, and researchers.

Shifting from pay-as-you-go to individual retirement accounts: A path to a sustainable pension system

With aging demographics and generous pension programs, the sustainability of the pay-as-you-go (PAYG) public pension system has been often questioned and has motivated policymakers to enact reforms in many countries. Although mandatory funded Individual Retirement Accounts (IRAs) appear to be a solution to this unsustainable system, existing reforms usually take place within the PAYG system by reducing pension benefits. This paper evaluates the effects of PAYG reforms as well as reforms that switch to the IRA system. Our analysis shows that PAYG reforms outperform IRA reforms in many aspects. In fact, PAYG reforms achieve higher GDP and yield higher welfare in the long run. The transition to the steady state is also found to be less volatile for PAYG reforms. While PAYG generally places a larger burden on future generations, the positive welfare effect of cross-subsidization dominates the welfare loss. Our findings may explain why pension reform is a controversial issue in most countries and why we rarely observe a shift to the IRA system.

Finding the patterns of IRA investment decision among Europeans aged 50+ with formal education and primary residence before the fall of communism. Evidence from SHARE-ERIC (Wave 7)

This paper deals with the analysis of determinants of the decision of investing in Individual Retirement Accounts (IRA) among Europeans aged 50 and over, starting from the SHARE-ERIC data set (Wave 7), filtered on dominant residences and full-time education before the fall of the Iron Curtain in Europe. Using more than 33.000 records, it validates the assumption that schooling and living place in former communist countries count for such financial behavior. Further, it brings two particular models with good accuracy of classification starting from the latter criterion. We applied many methods and techniques based on data mining and variable selection tools, probit and binary logistic regression analysis with average marginal effects, automatic cross-validations, mixed-effects modeling with random effects on countries, and prediction nomograms. We found that some influences from the same financial category as the dependent variable, such as having life insurance or ever investing in mutual funds or stocks count the most when dealing with investing in IRA. More, the younger respondents, those with computer skills required by their jobs, and those who have gone through at least a period of high stress were more likely to invest using such an instrument, no matter their residence and education. Besides, more educated people, those who suffered in their past by some form of discrimination, the relaxed, happier, more independent, and more interpersonal confident individuals were more prone to choose to invest this way. Moreover, this paper also confirms some country-level influences related to stock market capitalization to GDP ratio and Worldwide Governance Indicators.

A benchmarking approach to track and compare administrative charges on flow and balance in individual account pension systems

This article studies the effects on individual welfare caused by administrative charges or fees on balance (assets) and flow (contributions) during the accumulation phase of a defined-contribution (DC) pension plan under the system of individual retirement accounts (IA). Assuming a complete financial market and suitable deterministic functions to model contributions and administrative charges, we are able to contrast the optimal expected utility of terminal wealth generated under both charge schemes. In this framework, we also derive closed-form expressions to determine equivalent administrative charges, that is, the precise level of charges on flow and balance that makes them indifferent to the risk-averse participant. These expressions are independent of the market price of risk, the risky asset’s volatility and the participant’s utility function. Furthermore, our methodology can be helpful for regulators and policy makers aiming to dynamically track the future evolution of administrative charges or to fairly compare costs across DC pension systems, especially those operating under charge on flow.

Retiring the 401(k): A New Framework for Retirement Savings

Americans attempting to save for retirement face a maze of account options, each with their own unique tax consequences. Unfortunately, this maze also limits access to tax-advantaged retirement savings and takes money out of savers’ pockets. In this article, we recommend entirely eliminating traditional and Roth 401(k) accounts after a date to be specified by Congress. To compensate for dollars that workers (and their employers, through matching contributions) formerly contributed to these accounts, we propose raising the current contribution limits to traditional and Roth Individual Retirement Accounts (“IRAs”) proportionately. We argue that this reform would solve numerous inefficiencies and inequities in the current 401(k) system — it would effectively expand lower- and middle-class workers’ access to tax-advantaged retirement savings. In Part II we discuss how our proposal would solve seven severe problems plaguing the 401(k); in Part III we explain the options for transitioning from the current regime to an all-IRA regime; in Part IV we address some preliminary objections to our proposal.

Retirees in Profile: Evaluating Five Distinct Lifestyles in Retirement

Retirees in Profile: Evaluating Five Distinct Lifestyles in Retirement

Abandoned Retirement Savings

Retirement savings abandonment is a rising concern connected to defined contribution systems and default enrollment. We use tax data on Individual Retirement Accounts (IRAs) to establish that in 2017, 2.7% of 72.5 year-old account-holders in total abandoned $790 million; the median abandoned account held $5,400. Nearly all of these funds remain with plans and are not sent to state unclaimed property. Regression discontinuity estimates show that abandonment is 10 times higher in automatic rollover IRAs, a type of default account. We nest our findings in a model of retirement savings featuring forgetting to derive implications for passive and active savers.