An analysis of the $27,570bn private retirement system in the US and how policy and structural characteristics affect sustainability.

System overview

The US is the world’s biggest funded pension market. More than 700,000 private sector workplace retirement plans cover 136 million participants – active members and retirees - and roughly 6,000 state and local public sector plans serve 14.5 million active (working) members and 10.3 million retirees.1 2 

More than 5 million people are covered by the federal employees’ retirement system, and just over half of members are active.3 Some 46 million US households own at least one personal retirement savings account in the form of an Individual Retirement Account (IRA) and total US retirement system assets are estimated at over $30 trillion (Tables 1 and Figure 2).4 5

At first glance, the US retirement system appears fragmented. However, there is a relatively high degree of concentration among public and private sector workplace plans and their service providers. Conversely, the personal retirement market is fragmented, with individual account holders employing a large number of local advisers, albeit with the brokerage and custody arms of the market serviced by large domestic and multinational firms.

Responsible investment

The policy environment in the US is considerably less supportive of responsible investment than those in Australia and the UK. This is one of the factors behind the low number of private sector signatories to the Principles for Responsible Investment.

Table 1: US market structure

 Public sectorPrivate sectorIRAs
  DB DC DB 401(K) Other DC   
Total assets ($ billion) State and local 4,819 Federal 1,909 403(b) and 457 plans 1,460; Thrift Savings Plan 654 3,382 6,200 560 11,025 est
PRI signatories as % total assets 23%   DB = 0 401(k) < 1 n/a (non- institutional asset ownership)
Sector concentration Top 10 = 34% of assets Top 100 funds = 50% of assets Top 801 funds (0.15%) have 42% of assets   Highly fragmented
Service provider concentration Top 10 investment consultants dominate tax-exempt institutional advisory market Increasing concentration among recordkeepers Increasing concentration among recordkeepers
  Asset Managers: top 10 asset managers for DB have >20% of assets, top 10 for DC have >50% of assets  
Regulator Federal, state or county DOL (EBSA), Treasury Department, SEC for pooled investment vehicles and investment advisers Treasury for operation of IRAs, SEC for funds and advisors, DOL
Governance structures Fiduciary board or trustees Employer is a plan sponsor. Trustees administer and manage the plan, unless a separate committee is designated for investments. All are fiduciaries. Advisers usually operate under “Suitability standards
Asset allocation (median data, individual plans may vary widely) Equity 48% Fixed Income 22% Real Estate 8% Hedge Funds 7% Other 15%

Note: Predominately growth assets

 

  Equity 31% Fixed Income 49% Other 20%

Note: De-risking activity accelerating
Equity 43%, TDF 21% Balanced 3% Fixed Income 7% GIC 9% Other 17%

Note: balanced and TDF include the other asset classes
  (Saver in their 30s)

Equity 51% TDF 20% Balanced 7% Fixed Income 5% Other 16
Key barriers to system sustainability Legal interpretation Board structure and composition Lack of consensus on implementation Prioritisation/ DB end game Trustee capability ERISA/fiduciary responsibilities Focus on cost Restrictions on defaults Education, choice

Sources:

Defined benefit plans still dominate public sector retirement provision. However, since 1992 over 50% of US retirement assets have been held in individual account-based retirement savings plans, including private sector employment-related defined contribution plans and IRAs. IRAs and 401(k) plans are the fastest-growing components of the US retirement system in terms of assets. 

Figure 1: Assets in US retirement system, year-end, $ billion (excluding annuities)

Figure 1: Assets in US retirement system, year-end, $ billion (excluding annuities)

Public sector = Plans for federal, state and local government employees including TSP.
Source: Investment Company Institute, The US Retirement Market Fourth Quarter 2019