IRA accounts are a critical part of the financial planning process and often represent the largest piece of a family’s retirement savings. When defined benefit plans started to disappear in the 1990’s, 401(k) and other defined contribution plans became the primary retirement savings vehicle. While contributory IRA’s were popular at that time (and continue to be used today), the rollover IRA was just becoming an important investment vehicle. Today, IRA rollovers represent a significant amount of the net worth of many households.
In research Spectrem just recently completed, Capturing IRA Consolidations and Rollovers, 86 percent of investors indicated that they had an IRA rollover and more than a quarter of investors had 3 or more rollover accounts. Additionally, 42 percent of investors also indicated that their spouses had 2 or more IRA rollover accounts. Not only does this represent an opportunity for advisors to work with investors to consolidate the accounts, for planning purposes it’s important for advisors to be aware of all of these pockets of assets.
What is the average value of an IRA rollover account? For Mass Affluent investors (those with $100,000 to $1,000,000 of net worth*), the average IRA rollover balance is $111,000. For Millionaire households (those with $1,000,000 to $5,000,000 of net worth*), the average balance is $417,000. Households with more than $5,000,000 of net worth* (UHNW) have average rollover balances of $1,313,000. For Mass Affluent and Millionaire households, IRA assets represent about a third of total investable assets for the household. For UHNW, IRA assets are just under a quarter of investable assets.
As investors continue to prefer a holistic approach to the advisor-client relationship, including the IRA rollover accounts as well as any balances in the 401(k) or other DC plans is an important part of creating a financial plan. More than 50 percent of investors have IRA rollovers at different financial institutions. Roughly 60 percent of these investors haven’t consolidated their balances simply due to lack of time or because it seems too complicated.
Advisors need to reach out to investors and question them about various IRA rollover assets they may have. While not all investors will want to consolidate accounts (“I don’t want all of my eggs in one basket”), it might be appropriate for them to consolidate to ensure proper allocation of assets across their portfolios and perhaps even a diminution of fees.
IRA rollover accounts will continue to be an important part of the advisor-client relationship for the foreseeable future. Advisors need to make sure that investors are properly educated about their IRA accounts and that they are invested properly.
*Net worth calculations do not include the value of the primary residence.