Should Employees Add an IRA to Savings Mix?

Research finds Americans hold a variety of saving and investing priorities that all compete for a piece of the paycheck, from short-term savings to IRAs and employer-sponsored defined contribution plans.

The fourth annual TIAA-CREF IRA Survey finds 24% of Americans report adding to short-term savings is their most important financial priority when deciding how to allocate assets.

“This is three-times the number who said contributing to an individual retirement account [IRA] is their first priority, and in parity with the number (25%) who said they would prioritize contributing to an employer-sponsored retirement plan, such as a 401(k) or 403(b) plan,” TIAA-CREF researchers explain.

The research finds an “alarming number of people” don’t have access to a 401(k) or a 403(b) plan through work—especially given just 8% of people said they prioritize putting money into a private IRA.

“Considering these findings, it may not be surprising that a significantly low number of respondents (only 18%) report that they are currently contributing to an IRA,” TIAA-CREF says. “Another 14% say they have an IRA, but they are not currently contributing anything to it.”

TIAA-CREF says the survey results point to an important opportunity for retirement plan sponsors and advisers to impart better knowledge about the benefits of tax-advantaged savings, whatever the form of the account.

“Americans may be unaware of the benefits of having both an IRA and a 401(k) or 403(b),” the researchers add. “Of respondents who said they would not consider contributing to an IRA, 28% said they would not consider it because they already have a 401(k) or a 403(b) and don’t need an IRA.”

TIAA-CREF warns this thinking is flawed, given the shift away from guaranteed income through defined benefit plans and forecasts for increasingly long lives and expensive retirements. Researchers point to the Pension Rights Center’s recent report, published in conjunction with a U.S. Senate committee hearing, which calculates the total U.S. retirement income deficit to be as much as $7.7 trillion.

Further, respondents who have an IRA in addition to an employer-sponsored retirement plan appear to be making good decisions about how to use them, leading to increased retirement security. For example, 33% who are currently contributors to their IRA are getting their maximum employer match before contributing to an IRA. Additionally, 12% are maximizing contributions to their employer plan before contributing to an IRA, up from 9% last year.

Overall, 44% of those who are currently contributing to an IRA in addition to a 401(k) or 403(b) say they are contributing to their IRA regularly.

“That’s good news only if those individuals are first maximizing contributions to their employer plan and receiving the maximum employer match,” the researchers warn. “An adviser can help ensure that an individual is allocating savings appropriately for maximum benefits.”

Doug Chittenden, executive vice president, individual business for TIAA-CREF, says that once people know about IRAs and understand the difference an IRA can make, they tend to take advantage of this option.

“An alarming number of people don’t have access to a 401(k) or a 403(b) plan through work,” Chittenden adds. “But, for those who do, even though an employer-sponsored plan and an IRA can each stand alone as an effective retirement plan option, it’s important to consider an IRA as part of a mix of savings choices. Among other benefits, an IRA is a great investment option after maxing out 401(k) contributions.”

It’s important to get sound advice on how these options work best together, Chittenden adds, and it will be important for advisers and sponsors to track how any updated fiduciary rule language from the Department of Labor could impact IRA rollover advice and related education.

Other survey findings reveal a growing number of Americans are leaving assets in 401(k) and 403(b) plans with their former employers, in part because a lack of advice and knowledge.

“This year, 30% of respondents said they have left assets in one or more 401(k) or 403(b) plans at a previous employer, up from 22% in 2014 and 15% in 2013,” researchers explain. “Thirty percent say they have done so because they are satisfied with their past employer’s retirement savings option.”

However, nearly a quarter of respondents (23%) said they didn’t know a rollover was an option; and 20% said they didn’t know what to do, so they left their money in their past employer’s plan. Another 15% said they haven’t rolled over their previous plan assets due to lack of time.

“Ironically, while 15% of respondents noted concern over lack of time to roll over an employer-sponsored plan, 30% of respondents said they expect an IRA rollover to be the least time-consuming among a list of tasks that included renewing a driver’s license, getting a dental cleaning, cable installation and a home closing,” researchers conclude.

More results from the TIAA-CREF 2015 IRA Survey Executive Summary can be downloaded here. The survey was conducted by KRC Research by phone among a national random sample of 1,013 adults, age 18 years and older, from February 19 to 22, 2015, using a combination of landline and cell phone interviews.