Will Traditional IRAs Rollover and Die?

Though 401(k) and 403(b)s are becoming more popular retirement investment vehicles, the future of traditional IRAs is still very much alive.

The population of Americans over age 65 is expected to double by 2040, and many of these people will face the daunting task of managing their nest eggs to meet projected expenses for the rest of their lives. Bearing that in mind, the high wage earners are trying to put away as much as they can to ensure that they will not outlive their retirement funds.

The notion in the industry is that the traditional IRA, which was born 30 years ago as a tax-sheltered retirement savings account, has become somewhat of an afterthought for Americans saving for retirement due to IRS limits on traditional IRA deductions and the evolution of the retirement landscape. In the big scheme of things, 401(k) and 403(b) savings plans have become the investment vehicle of choice for baby boomers looking to maximize their nest eggs because of greater maximum contribution limits and employer matching benefits. As such, interest in traditional IRAs has waned.

Since 401(k) and 403(b) plans are less costly and have become more available to smaller companies, most employees have opted to participate in these plans. However, "I don’t think traditional IRAs will go away because it would mean that small companies would go away," said Chip Roame at Tiburon Strategic Advisors. Furthermore, "the one-third of the population that is self-employed doesn’t set up a retirement plan; [these people] just invest in an IRA," added Roame. For the most part, semi-retirees who work for limited income and those income earners who set up a spousal IRA will continue to make contributions, he said. As such, IRAs are not likely to become obsolete unless President Bush gets re-elected and his administration decides to introduce the different retirement framework that it has been toying with for the past year, said Craig Bramhall, vice president, wealth management strategies at American Express Financial Advisers.

Today, the primary role of the IRA in the current market environment is as a vehicle to maintain tax-deferred status or as a method of saving for retirement for the millions of people who don’t have an employer qualified plan. "While traditional IRAs funded with ongoing contributions face a tough future, most people [put] the money in their employee sponsored retirement plans into an IRA rollover when they are ready to fund their retirement needs," according to Michael Hatlee, vice president and manager, at NY.-based Chemung Canal Trust Company.

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Hatlee explained that while 401(k) plans weren’t officially sanctioned until 1978, these plans have experienced significant growth since. In 2003, there were 424,460 plans covering 51 million participants, according to an Employee Benefits Research Institute study. Conversely, the growth in IRAs over the same period has increased from 2.4 million participants in 1978 to 3.5 million in 2003. Meanwhile, the percentage of tax returns that showed individuals making a contribution to an IRA has not changed from 2.7% in over 25 years, although total assets skyrocketed to $2.33 trillion in 2003 from just $32 billion in 1978. The majority of new assets came from 401(k)s and other employee-sponsored plans being transferred into IRA Rollovers, said Hatlee.