Wen/Sun Bo, columnist of Sina Financial Opinion Leader
Pension is the main source of funds for the US asset management industry, so the American Investment Corporation Association (ICI) regularly releases reports and data statistics on the pension market. Recently, The US Retirement Market Fourth Quarter 2021 has been released. We have sorted out the relevant content for your reference.
It should be noted here that the federal public pension OASDI, the first pillar of the United States (with a scale of US $2.9 trillion in 2020), does not participate in capital market investment, but is only used to purchase special bonds issued specifically for it. Therefore, the US pension market generally only involves two or three pillar supplementary pensions. The annual report of ICI classifies the US supplementary pension into three categories. One is the DC plan with defined contribution system under the two pillars, which mainly includes employer initiated DC plan (including 401 (k) plan), 403 (b) plan, 457 plan and TSP plan (Federal Employee Retirement System (FERS) savings plan); The second is the DB plan of the two pillar salary determination system, which is subdivided into the government DB plan and the private DB plan; The third is the three pillar IRA plan and other pension plans (including all fixed and variable annuities except the above retirement plans and IRAs).
1、 The total scale of supplementary pension is nearly 40 trillion dollars, accounting for about 1/3 of the financial assets of American households
1. The proportion of supplementary pension in GDP in the United States continues to increase, hitting a record high
Since 1974, the pension scale in the United States has fluctuated and increased, with a compound annual growth rate of 8.1% in the past 10 years. By the end of 2021, the scale of supplementary pension in the United States had reached US $39.4 trillion, up 11.6% year on year. As the scale of pension increases, its share in GDP also continues to rise. In 2021, the GDP of the United States will be 23 trillion dollars, and the proportion of supplementary pension in GDP will be 171%, a record high.
Figure: The scale of various supplementary pensions in the United States from 1974 to 2021 and their proportion in GDP in that year
Note: The left axis shows the fund size; The right axis shows the proportion of pension in GDP.
2. Pension assets accounted for more than 30% of the financial assets of American households
Pension has increasingly become one of the important ways for American families to invest and finance, and its proportion in American family financial assets has gradually increased. Since 1995, the proportion of supplementary pension in the financial assets of American families has remained stable between 30% and 35%. By the end of 2021, the financial assets of American households had reached 118.2 trillion yuan, of which supplementary pensions accounted for 33%.
Figure: The proportion of supplementary pension in household financial assets in the United States from 1974 to 2021
3. The proportion of DB plan continues to decline, and DC plan has become the main type of supplementary pension in the United States
DB plan was once the largest supplementary pension plan in the United States, but with the passage of time, the proportion of IRA and DC plans has gradually increased, and they have become the most important two types of supplementary pension plans in the United States. By the end of 2021, the fund size of IRA, DC plan, government DB and private DB plan has reached US $13.9 trillion, US $11 trillion, US $8 trillion and US $3.8 trillion respectively, accounting for 35.4%, 27.9%, 20.4% and 9.7% of the total supplementary pension.
Figure: Proportion of various plans in US supplementary pension from 1974 to 2021
2、 Supplementary pension and mutual fund industries promote each other and develop together
1. 32% of supplementary pensions are invested in mutual funds, accounting for 47% of the market size of mutual funds
By the end of 2021, the size of American pension funds invested in mutual funds was $12.6 trillion, accounting for 32%; During the same period, the total size of the U.S. mutual fund market was nearly $27 trillion, of which pension assets accounted for 47%. It can be seen that over the past 30 years, the interaction between American pension funds and mutual funds has become increasingly close, achieving a positive interaction.
Figure: The participation of supplementary pension assets and mutual funds in the United States from 1990 to 2021
2. Supplementary pension is the main source of funding for US pension target funds
The proportion of supplementary pension in the target date of the United States has remained between 85% and 92% in the past 20 years. By the end of 2021, the total fund size on the target date is $1.8 trillion, of which $1.5 trillion is pension assets, accounting for 85%. Specifically, 66% of mutual fund assets on the target date are held through the two pillar DC plan, and 19% are held through the IRA account. The reason why DC plans account for a large proportion is that they use pension target date funds as default investment options.
Figure: Distribution of investment sources of US target date funds from 1996 to 2021
Note: The asset scale is listed on the left, with the coordinate unit of US $1 billion.
Supplementary pension is also one of the main sources of funds for target risk funds, and its proportion has remained around 50% in the past 20 years. By the end of 2021, the target risk fund size is US $0.4 trillion, accounting for 46% of pension funds. Of which, assets from IRA accounts amounted to 0.1 trillion US dollars, accounting for 28%; DC's planned assets are US $0.08 trillion, accounting for 18%.
Figure: Distribution of investment sources of targeted risk funds in the United States from 1996 to 2021 (in billions of dollars)
Note: The asset scale is listed on the left, with the coordinate unit of US $1 billion.
3. A large number of supplementary pensions are invested in index funds, accounting for more than 40%
In the past 20 years, the proportion of supplementary pension in index funds has remained stable between 40% and 50%. In 2021, the scale of index funds will be 5.7 trillion dollars, 43% of which will come from supplementary pension accounts. Specifically, the IRA account assets in the index funds are US $0.9 trillion, accounting for 16%; DC planned assets are 1.6 trillion US dollars, accounting for 27%.
Figure: Distribution of investment sources of American index funds from 1996 to 2021
Note: The asset scale is listed on the left, with the coordinate unit of US $1 billion.
3、 Planned investment and operation of DC
1.401 (k) is the largest type of DC plan, and its proportion has steadily increased to 70%
DC plans mainly include 401 (k), 403 (b), 457, TSP and other private DC plans [1]. Since 1994, 401 (k) has occupied the most important position in all DC plans, and its proportion has risen steadily. In 2021, the total size of 401 (k) plan fund will be 7.7 trillion US dollars, accounting for 70.4% of the DC plan. 403 (b) The fund size of the plan is $1.3 trillion in 2021, accounting for 11.7% of the DC plan. Although the proportion has continued to decline since 1994, it is still the second largest DC plan in the United States. By the end of 2021, the fund size of TSP, 457 and other private DC plans will be 0.8 trillion, 0.4 trillion and 0.7 trillion dollars respectively, accounting for 7.6%, 4.1% and 6.2% of the US DC plans.
Figure: Proportion of fund size of various plans in the US DC plan from 1994 to 2021
2. The DC plan still focuses on the allocation of equity assets, and the proportion of mixed assets has gradually increased
From 1992 to 2021, the US DC plan has been dominated by equity mutual fund investment, and the proportion of overseas equity allocation has gradually increased in recent years. However, in the past 30 years, the allocation proportion of overall stock funds has gradually decreased from 70% to 50%, the proportion of mixed funds has gradually increased, and the allocation proportion of bond funds has basically remained stable. By the end of 2021, 58% of the US DC plan, nearly $6.4 trillion, had been invested in mutual funds. From the perspective of its asset allocation, 60% of this capital is invested in domestic and global stock markets, and 26% of its assets are invested in hybrid funds.
Figure: Asset allocation of DC planned to invest in mutual funds from 1992 to 2021
3.401 (k) is dominated by mutual fund investment, and the allocation proportion has steadily increased by more than 60%
To be specific, take the 401 (k) plan, the most important DC plan in the United States, for example. By the end of 2021, 5 trillion of the $7.7 trillion 401 (k) plan assets had been invested in mutual funds, accounting for 64%. As shown in the figure below, from 1996 to 2013, the proportion of 401 (k) assets invested in mutual funds continued to rise; Since 2016, the proportion of 401 (k) assets invested in mutual funds has stabilized at about 64%.
Figure: 1996-2021 401 (k) plan assets invested in mutual funds
Note: The left coordinate shows the asset scale, and the right coordinate shows the asset proportion.
4.401 (k) has a high proportion of equity in fund allocation, and the total allocation proportion of stocks and hybrid funds is nearly 90%
Similar to the overall allocation of the DC plan, in the long run, equity funds are still the main investment direction of mutual funds held by 401 (k) plans. During this period, the proportion of assets invested in global stock markets and hybrid funds also increased significantly. By the end of 2021, 401 (k) assets invested in mutual funds totaled $5 trillion, of which $3 trillion, $1.4 trillion, $0.5 trillion and $0.1 trillion were invested in domestic and foreign stock markets, hybrid funds, bond markets and money markets, accounting for 60%, 28%, 10% and 2% respectively.
Figure: 1990-2021 Allocation of 401 (k) planned to invest in mutual funds
5.403 (b) Allocated ordinary annuity and quasi public offering annuity share equally, and the proportion of non variable annuity increases
Look again at the second largest DC pension 403 (b) plan. Since 1996, the proportion of ordinary annuity insurance [2] and variable annuity allocated by 403 (b) plan has gradually declined, while the proportion of fund size invested in non variable annuity has gradually increased. Among them, ordinary annuity has always been the main capital flow of 403 (b) plan. In 2021, ordinary annuities will account for 48% of 403 (b) plan funds, and the fund size invested in variable annuity and non variable annuity mutual funds will account for 24% and 28% respectively.
It should be noted here that since the 403 (b) plan is not protected by ERISA, the 403 (b) account participants are protected at a lower level than the participants of the plan that requires ERISA compliance. In order to protect the fund security of 403 (b) plan, the permitted investment scope of 403 (b) fund is narrower than other plans. Although 403 (b) plan is now allowed to invest in variable annuity insurance, and then the variable annuity insurance will invest in mutual funds, investors can only choose from quota or variable insurance, and other direct securities investment, such as stocks, REITS and mutual funds, is prohibited.
Figure: 1996-2021 403 (b) Proportion of various assets in the plan
4、 IRA account investment and operation
1. Traditional IRA is still the main type of IRA, and the proportion of Rose IRA is gradually increasing
From the perspective of account types, IRA accounts mainly include traditional IRAs SEP IRA、SAR-SEP IRA、 Ross IRA and SIMPLE IRA [3]. Traditional IRA has always been the most important account type. In 1997, the proportion of traditional IRA was as high as 95%, but in recent years, the proportion has declined. By 2021, the assets of traditional IRA accounts will be 11.8 trillion dollars, accounting for 85%. Rose IRA shows an obvious growth trend, which is the second highest proportion of assets in the current IRA account. By the end of 2021, the asset size of the Rose IRA account was $1.3 trillion, accounting for 10%. At the end of 2021, the assets of SEP, SAR-SEP IRA and SIMPLE IRA are relatively small, amounting to US $0.6 trillion and US $0.2 trillion respectively, accounting for 4% and 1% respectively.
Figure: Proportion of fund size of each plan in IRA from 1997 to 2021
2. The allocation of bank deposits by IRA has been greatly reduced, and the allocation of equity assets such as stocks and mutual funds has reached 90%
In the past 50 years, the asset investment structure in IRA accounts has undergone tremendous changes, from bank deposits to stock and fund investments. In 1975, bank deposits accounted for 72% of IRA account assets, and then the proportion gradually declined. On the contrary, the proportion of assets invested in mutual funds continued to rise, and its growth rate exceeded other assets, gradually becoming the largest proportion of assets. The proportion of IRA account assets invested in mutual funds reached 52% in 2005, becoming the highest in history. After 2005, the proportion invested in mutual funds began to decline, while the proportion of direct investment assets such as stocks continued to rise.
By the end of 2021, the assets of IRA account had totaled 13.9 trillion US dollars, dominated by stock investment and mutual fund investment. Among them, stocks, bonds and other direct investment assets amounted to $6.4 trillion, accounting for the largest proportion, 46%; The second is mutual funds of $6.2 trillion, accounting for 45%. In addition, the assets of bank deposit certificates and insurance products were 0.7 trillion US dollars and 0.6 trillion US dollars respectively, accounting for about 5% of the total.
Figure: Proportion of various assets in IRA from 1975 to 2021
3. The fund allocation of IRA is also dominated by equity funds, with equity funds and hybrid funds accounting for nearly 80%
Among the mutual fund assets invested in the IRA account, the domestic stock market is the main capital investment direction. From 1990 to 2021, the proportion of mutual funds held in IRA accounts investing in global stock markets and hybrid funds has increased, while the proportion of investment in money markets has declined significantly. By the end of 2021, 59% of the $6.2 trillion mutual fund assets invested in IRA accounts were invested in domestic and foreign stock markets, 19% were invested in hybrid funds, and 17% were invested in bond funds.
Figure: Asset allocation of IRAs invested in mutual funds
Note: The data in this paper is from ICI The US Retirement Market Fourth Quarter 2021, which is assisted by Cui Chenchen and Zhang Xuan.
[1] 401 (k) plan for employees of for-profit enterprises; 403 (b) is intended for employees of non-profit organizations; 457 plan is for state and municipal government employees; TSP is for federal government employees; Other private DC plans include Keoghs plan and DC plan without 401 (k) nature, among which Keoghs plan is mainly for self-employed and unincorporated enterprises.
[2] According to ici, this refers to annuity products issued by life insurance companies and held by 403 (b) except variable annuity (VA) mutual fund.
[3] The payment of traditional IRA can be deducted before tax; The payment of Rose IRA cannot be deducted before tax, but the funds withdrawn can be tax-free when they meet the conditions. SEP IRA is paid directly by the employer to each employee's IRA account, and self-employed people usually choose this plan. SAR-SEP IRA is a SEP IRA that was established by employers before 1997 to allow pre payment tax deduction, and has been replaced by SEP IRA. SIMPLE IRA is a savings incentive matching plan set up by the employer for employees of small and medium-sized enterprises with less than 100 employees. Employees' contributions can be deducted before tax, and the employer provides matching contributions or non selective contributions (whether employees pay or not, the employer will pay to the account).
(The author of this article introduces: doctor of management, post doctor of finance, invited member of China Pension Finance 50 Forum, guest researcher of Human Resources Development Research Center of Renmin University of China. He has focused on pension research for more than ten years. WeChat official account: Sun Bo Pension Research)
