Why Rich People Chose IRAs Over 401(k)s


BOSTON (TheStreet) — Wealthy Americans are holding more of their assets in individual retirement accounts than in 401(k) and other employer-sponsored plans, a new study says.

Cogent Research studied 4,000 affluent investors and found that while the overall ownership of retirement accounts has declined since 2006, the use of workplace-based retirement accounts — including 401(k) and 403(b) plans — have diminished at a more rapid pace. The overall use of workplace-based retirement accounts has decreased by 23% since 2006, according to the firm. IRA participation rates, however, slid by only 5%.

Cogent's analysis found that "the majority of dollars investors once allocated to employee plans have been funneled into IRA accounts and, to a lesser extent, bank accounts." Affluent Americans now hold 31% of their assets in IRAs and 25% in workplace plans.

The trend could lead to a renewed arms race among financial firms seeking to tap demand for IRAs. Last year, 19 investment firms boosted the portion of assets investors held in IRAs by 15%, Cogent's study said. Seven firms increased the average portion of primary client assets in IRAs by 20% or more: Fidelity Investments, ING, Bank of America's Merrill Lynch, Raymond James, USAA and Wells Fargo.

Ameriprise, Charles Schwab, Edward Jones, Fidelity, LPL Financial, Merrill Lynch, Raymond James, UBS and Vanguard were among the firms whose clients held one-third or more of their assets in IRAs.

Cogent expects ongoing "rollover momentum" to boost IRA asset gains this year. While fewer investors have assets sitting in retirement plans sponsored by former employers (24% in 2009 versus 31% in 2008), those who do may be more likely to roll over those assets into an IRA (45% in 2009 compared to 39% in 2008).

Meredith Lloyd Rice, Cogent's senior project director and the study's author, says new rules guiding the conversion of traditional IRAs to Roth IRAs should help fuel that momentum and increase competition among money managers.

The weak job market may also be a boon for those who profit from IRAs.

"Among boomers, in particular second-wave boomers, we saw a significant uptick among affluent investors who said that they were starting their own businesses," Lloyd Rice says. "We see it as an enormous opportunity for the distributors, the investment firms and mutual fund firms that might want to consider who they are going to partner with to be part of the action."

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