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A LETTER FROM ICI'S
CHIEF ECONOMIST

ICI RESEARCH:
STAFF AND PUBLICATIONS

SECTION 1:
OVERVIEW OF
U.S.-REGISTERED INVESTMENT COMPANIES

SECTION 2:
RECENT MUTUAL FUND TRENDS

SECTION 3:
EXCHANGE-TRADED FUNDS

SECTION 4:
CLOSED-END FUNDS

SECTION 5:
MUTUAL FUND FEES AND EXPENSES

SECTION 6:
CHARACTERISTICS OF MUTUAL FUND OWNERS

SECTION 7:
THE ROLE OF MUTUAL FUNDS IN RETIREMENT AND EDUCATION SAVINGS

DATA TABLES

APPENDIX A:
HOW MUTUAL FUNDS AND INVESTMENT COMPANIES OPERATE

APPENDIX B:
ICI STATISTICAL RELEASES AND RESEARCH PUBLICATIONS

APPENDIX C:
SIGNIFICANT EVENTS IN FUND HISTORY

TIMELINE:
SIGNIFICANT EVENTS FOR FUNDS IN THE FINANCIAL CRISIS

GLOSSARY

FACT BOOK ARCHIVE

National policies that have created or enhanced tax-advantaged savings accounts have proved integral to helping Americans prepare for retirement and other long-term savings goals. Because many Americans use mutual funds in tax-advantaged accounts to reach these goals, ICI studies funds’ role in the retirement and education savings markets and the investors who use IRAs, 401(k) and 529 plans, and other tax-advantaged savings vehicles.

The U.S. Retirement Market

U.S. retirement assets decreased to $14.0 trillion in 2008, down 22 percent from 2007 (Figure 7.1). Retirement market assets are held in a variety of tax-advantaged plan types. Other than federal government pensions (which hold primarily nonmarketable U.S. government securities), all types of retirement assets declined in value in 2008. Private-sector defined benefit (DB) plan assets fell 27 percent; state and local government employee retirement plan assets fell 27 percent; employer-sponsored defined contribution (DC) plan assets fell 22 percent; individual retirement accounts (IRAs) fell 24 percent; and annuity reserves outside of retirement plans fell 15 percent.

FIGURE 7.1

U.S. RETIREMENT ASSETS DECLINED IN 2008

Trillions of dollars, year-end, selected years

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1Other plans include private-sector DB plans; federal, state, and local pension plans; and all fixed and variable annuity reserves at life insurance companies less annuities held by IRAs, 403(b) plans, 457 plans, and private pension funds. Federal pension plans include U.S. Treasury security holdings of the civil service retirement and disability fund, the military retirement fund, the judicial retirement
funds, the Railroad Retirement Board, and the foreign service retirement and disability fund. These plans also include securities held in the National Railroad Retirement Investment Trust and Federal Employees Retirement System (FERS) Thrift Savings Plan (TSP).
2DC plans include private employer-sponsored DC plans (including 401(k) plans), 403(b) plans, and 457 plan assets.
Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division

The largest components of retirement savings were IRAs and employer-sponsored DC plans, holding $3.6 trillion and $3.5 trillion, respectively, at year-end 2008. Private-sector DB pension funds held $2.0 trillion in assets, state and local government employee retirement plans held $2.3 trillion in assets, and federal government DB plans and the federal employees’ Thrift Savings Plan held $1.2 trillion in assets. In addition, there were $1.4 trillion in annuity reserves outside of retirement plans at year-end 2008.

Eighty-two million, or 70 percent of, U.S. households report that they had employer-sponsored retirement plans, IRAs, or both in May 2008 (Figure 7.2). Sixty-one percent of U.S. households reported that they had assets in DC plan accounts, were receiving or expecting to receive benefits from DB plans, or both. Forty-one percent of households reported having assets in IRAs. Thirty-two percent of households had both IRAs and employer-sponsored retirement plans.

FIGURE 7.2

MANY U.S. HOUSEHOLDS HAD TAX-ADVANTAGED RETIREMENT SAVINGS

Percentage of U.S. households, May 2008

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1IRAs include traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SIMPLE IRAs, SEP IRAs, and SAR-SEP IRAs).
2Employer-sponsored retirement plans include DC and DB retirement plans.
Sources: Investment Company Institute and U.S. Census Bureau (Fundamentals, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2008”)

Individual Retirement Accounts

At year-end 2008, IRA assets totaled $3.6 trillion, down 24 percent from year-end 2007 (Figure 7.3). Mutual fund assets held in IRAs were $1.6 trillion at year-end 2008, a decline of $706 billion, or 31 percent, from 2007. Assets managed by mutual funds were the largest component of IRA assets, followed by securities held directly through brokerage accounts ($1.3 trillion at year-end 2008). The mutual fund industry’s share of the IRA market increased from 22 percent in 1990 to 49 percent at year-end 2007, but fell to 44 percent by year-end 2008.

FIGURE 7.3

IRA ASSETS

Billions of dollars, year-end, 1990–2008

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1Data are preliminary.
2Bank and thrift deposits include Keogh deposits.
3Life insurance company IRA assets are annuities held by IRAs, excluding variable annuity mutual fund IRA assets, which are included in mutual funds.
4Category excludes mutual fund assets held through brokerage accounts, which are included in mutual funds.
eData are estimated.
Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute, Federal Reserve Board, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division

Since 1990, assets in IRAs have grown primarily due to the investment performance of the securities held in IRA portfolios and rollovers into IRAs from employer-sponsored retirement plans. Various laws enacted since 1996 introduced new types of IRAs. Furthermore, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), enacted in 2001, increased the amount investors—especially those aged 50 or older—can contribute to IRAs. The Pension Protection Act (PPA), enacted in 2006, made these EGTRRA enhancements permanent. ICI household survey data and Internal Revenue Service Statistics of Income Division tabulations of IRA contributions indicate households responded to these increased opportunities to save.

IRA Investors: Traditional, Roth, and Employer-Sponsored IRAs

Judging by the incidence of IRA ownership among U.S. households, IRAs are an important component in Americans’ retirement savings strategy. Created in 1974 under the Employee Retirement Income Security Act (ERISA), IRAs were designed with two goals. First, they provide individuals not covered by workplace retirement plans with an opportunity to save for retirement on their own. They also allow workers changing jobs a means to preserve the tax benefits and growth opportunities that employer-sponsored retirement plans provide.

Four out of 10 U.S. households, or 47.3 million, owned IRAs as of mid-2008 (Figure 7.4). An ICI survey found that these IRA households generally are headed by middle-aged individuals with moderate household incomes. IRA owners are more likely to hold mutual funds, especially long-term mutual funds, in their IRA portfolios than any other type of investment.

FIGURE 7.4

47 MILLION U.S. HOUSEHOLDS OWNED IRAs

May 2008

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Note: Households may hold more than one type of IRA.
Sources: Investment Company Institute and U.S. Census Bureau (Fundamentals, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2008”)

As of mid-2008, 37.5 million U.S. households owned “traditional” IRAs—defined as those IRAs first allowed under ERISA—while 18.6 million U.S. households owned Roth IRAs, first made available in 1998 under the Taxpayer Relief Act of 1997. Ten million U.S. households owned employer-sponsored IRAs (SIMPLE IRAs, SEP IRAs, or SAR-SEP IRAs).

TRADITIONAL IRAs. Households owning traditional IRAs held a median of $60,000 in these accounts in 2008 and had a median household income of $75,000. Fifty-two percent of these households had traditional IRAs that included assets “rolled over” from employer-sponsored retirement plans. Traditional IRA households with rollovers typically had two accounts; traditional IRA households without rollovers typically had one account. Thirty-four percent of traditional IRA–owning households also owned Roth IRAs and 14 percent also owned employer-sponsored IRAs. Individuals heading households with traditional IRAs had a median age of 53 years, and 68 percent were employed.

ROTH IRAs. The majority of households with Roth IRAs owned one Roth IRA account with a median balance of $20,000 in 2008, and these households had a median income of $87,500. About 28 percent of Roth IRA–owning households opened a Roth IRA as their first IRA. Sixty-eight percent of households with Roth IRAs also owned traditional IRAs, and 15 percent owned employer-sponsored IRAs. Individuals heading households with Roth IRAs had a median age of 47 years, and 81 percent were employed.

EMPLOYER-SPONSORED IRAs. Households with employer-sponsored IRAs had a median of $22,000 in employer-sponsored IRAs and a total of $65,000 invested in all types of IRAs in 2008. Fifty-four percent of these households also owned traditional IRAs and 28 percent owned Roth IRAs. Thirty-nine percent of individuals heading households with employer-sponsored IRAs were self-employed. Individuals heading households with employer-sponsored IRAs had a median age of 45 years, and 82 percent were employed.

Nearly three-quarters of IRA-owning households had IRA assets invested in mutual funds, usually stock mutual funds (Figure 7.5). Far fewer households owned other types of investments in their IRAs: 42 percent held individual stocks, 34 percent held annuities, and about 28 percent held bank deposits.

FIGURE 7.5

HOUSEHOLDS INVESTED THEIR IRAs IN MANY TYPES OF ASSETS

Percentage of U.S. households owning IRAs, May 2008*

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*Multiple responses are included.
Source: Fundamentals, “Appendix: Additional Data on IRA Ownership in 2008”

Defined Contribution Plans

At the end of 2008, employer-sponsored DC plans—which include 401(k) plans, 403(b) plans, 457 plans, Keoghs, and other DC plans—held an estimated $3.5 trillion in assets (Figure 7.6). With $2.4 trillion in assets at year-end 2008, 401(k) plans held the largest share of employer-sponsored DC plan assets. Two types of plans similar to 401(k) plans—403(b) plans, which allow employees of educational institutions and certain nonprofit organizations to receive deferred compensation, and 457 plans, which allow employees of state and local governments and certain tax-exempt organizations to receive deferred compensation—held another $712 billion in assets. The remaining $455 billion in DC plan assets were held by other DC plans without 401(k) features.

FIGURE 7.6

DEFINED CONTRIBUTION PLAN ASSETS BY TYPE OF PLAN

Billions of dollars, year-end, selected years

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eData are estimated.
*Other DC plans include Keoghs and other DC plans (profit-sharing, thrift-savings, stock bonus, and money purchase) without 401(k) features.
Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, and American Council of Life Insurers

At the end of 2008, $1.1 trillion of 401(k) plan assets were invested in mutual funds (Figure 7.7). Mutual funds’ share of the 401(k) market increased from 9 percent in 1990 to an estimated 54 percent at year-end 2007, but fell to an estimated 47 percent at year-end 2008.

FIGURE 7.7

401(k) PLAN ASSETS

Billions of dollars, year-end, selected years

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*Data are preliminary.
eData are estimated.
Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute, Federal Reserve Board, and Department of Labor

401(k) Participants: Asset Allocations, Account Balances, and Loans

For many American workers, 401(k) plan accounts have become an important part of their retirement planning. The income these accounts provide in retirement depends, in part, on the asset allocation decisions of plan participants.

According to research conducted by ICI and the Employee Benefit Research Institute (EBRI), the asset allocations of 401(k) plan participants vary depending on a variety of factors, including demographics. For example, younger participants tend to allocate a larger portion of their account balances to equity securities (which include equity mutual funds and other pooled equity investments and the company stock of the employer), while older participants are more likely to invest in fixed-income securities such as money funds, bond funds, and guaranteed investment contracts (GICs) and other stable value funds. On average, at year-end 2007, individuals in their twenties invested 56 percent of their assets in equity funds and company stock; 17 percent in GICs, stable value funds, money funds, and bond funds; and 23 percent in lifecycle funds and non-lifecycle balanced funds (Figure 7.8). By comparison, individuals in their sixties invested 49 percent of their assets in equity securities, 34 percent in fixed-income securities, and 15 percent in lifecycle funds and non-lifecycle balanced funds.

FIGURE 7.8

401(k) ASSET ALLOCATION VARIED WITH PARTICIPANT AGE

Average asset allocation of 401(k) account balances, percentage, year-end 2007

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Note: Funds include mutual funds and other pooled investments. Components may not add to 100 percent because of rounding.
Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project (Perspective, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2007”)

The median age of 401(k) plan participants was 44 years at year-end 2007, and the average account balance, excluding plan loans, was $65,454. Account balances tended to be higher the longer 401(k) plan participants had been working for their current employers and the older the participant. Workers in their sixties with at least 30 years of tenure at their current employers had an average 401(k) account balance of $210,457 (Figure 7.9).

FIGURE 7.9

401(k) BALANCES TEND TO INCREASE WITH AGE AND JOB TENURE

Average 401(k) participant account balance, year-end 2007

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Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project (Perspective, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2007”)

Most 401(k) participants did not borrow from their plans. At year-end 2007, only 18 percent of those eligible for loans had loans outstanding. The average unpaid loan balance for these participants represented about 12 percent of their remaining account balances (net of the unpaid loan balances).

Services and Expenses in 401(k) Plans

In deciding whether to offer 401(k) plans to their workers, employers must decide if the benefits of offering a plan (in attracting and retaining quality workers) outweigh the costs of providing the plan and plan services (both the compensation paid to the worker and any other costs associated with maintaining the plan and each individual plan participant account).

401(k) plans are complex to maintain and administer, and are subject to an array of rules and regulations that govern their operation. Employers offering 401(k) plans typically hire service providers to operate these plans, and these providers charge fees for their services.

As with any employee benefit, the employer generally determines how the costs will be shared between the employer and employee. Fees can be paid directly by the plan sponsor (i.e., employer), directly by the plan participant (i.e., employee), indirectly by the participant through fees or other reductions in returns paid to the investment provider, or by some combination of these methods (Figure 7.10).

FIGURE 7.10

A VARIETY OF ARRANGEMENTS MAY BE USED TO COMPENSATE 401(k) SERVICE PROVIDERS

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Note: In selecting the service provider(s) and deciding the cost-sharing for the 401(k) plan, the employer/plan sponsor will determine which combinations of these fee arrangements will be used in the plan.
Source: Fundamentals, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2007”

As noted, 47 percent of 401(k) assets at year-end 2008 were invested in mutual funds. 401(k) plan participants holding mutual funds tend to invest in low-cost funds with below-average portfolio turnover. Both characteristics help to keep down the costs of investing in mutual funds through 401(k) plans. For example, at year-end 2007, 23 percent of 401(k) stock mutual fund assets were in funds that had total annual expense ratios below 0.50 percent of fund assets, and another 56 percent had expense ratios between 0.50 percent and 1.00 percent (Figure 7.11). On an asset-weighted basis, the average total expense ratio incurred on 401(k) participants’ holdings of stock mutual funds through their 401(k) plans was 0.74 percent in 2007, compared with an average total expense ratio of 0.85 percent for stock mutual funds industrywide.

FIGURE 7.11

401(k) STOCK MUTUAL FUND ASSETS CONCENTRATED IN LOW-COST FUNDS

Percentage of 401(k) stock mutual fund assets, year-end 2007

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*The total expense ratio, which is reported as a percentage of fund assets, includes fund operating expenses and 12b-1 fees.
Note: Figures exclude mutual funds available as investment choices in variable annuities.
Sources: Investment Company Institute and Lipper (Fundamentals, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2007“)

Distributions from Defined Contribution Plans and IRAs

With participant-directed DC plans and IRAs representing an increasing share of household retirement assets, the decisions participants make about distributing those assets in retirement has become an issue of increasing interest to plan sponsors, financial institutions, and policymakers. In late 2007, ICI surveyed recent retirees who had actively participated in DC plans about how they used plan proceeds at retirement.

Seventy percent of respondents reported having more than one option for how their plan assets were distributed at retirement, including the options to take out the entire balance as a lump sum, take installment payments from the plan, purchase an annuity, or leave the assets in the plan and delay taking any distribution. Twenty-five percent of respondents who reported having more than one distribution option chose to delay taking some or all of their balance; 21 percent annuitized some or all of their balance; 10 percent chose to take installment payments from the plan; and 54 percent took some or all of their balance as a lump-sum distribution (Figure 7.12). Of respondents who received a lump-sum distribution, 86 percent of respondents rolled over some or all of the balance to an IRA or otherwise reinvested the assets (Figure 7.13). The remaining 14 percent spent all the proceeds of the distribution.

FIGURE 7.12

DISTRIBUTION OPTIONS SELECTED AT RETIREMENT BY RETIREES HAVING
MORE THAN ONE OPTION

Percentage of respondents who had multiple options from their DC plans1, 2

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1Based upon respondents’ recall, 70 percent of respondents indicated they had multiple distribution options at retirement. Responses are from a survey of employees retiring between 2002 and 2007 who were interviewed in the fall of 2007.
2Multiple responses are included; 45 respondents with multiple options chose to receive a partial lump-sum distribution with either a reduced annuity or reduced installment payments, or chose to defer part of the distribution.
3Distributions must begin no later than April 1 of the year following a retired person’s attainment of age 70½.
Source: Defined Contribution Plan Distribution Choices at Retirement

FIGURE 7.13

USE OF LUMP-SUM DISTRIBUTIONS AT RETIREMENT

Percentage of respondents*

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*Based upon respondents’ recall. Responses are from a survey of employees retiring between 2002 and 2007 who were interviewed in the fall of 2007.
Source: Defined Contribution Plan Distribution Choices at Retirement

Among all survey respondents, including those who recalled not having a choice about how to take their DC plan distribution, more than half of the retirees reported taking a lump-sum distribution, and only 7 percent took a lump sum and spent all the proceeds (Figure 7.14). Twenty-four percent either annuitized or took installment payments, while about 16 percent deferred the entire balance. Nine percent reported multiple dispositions with respect to their DC balance. Only 3 percent of DC plan account balances were cashed out and spent at retirement; 31 percent were annuitized; and 66 percent were left in the plan or reinvested (Figure 7.15).

FIGURE 7.14

WHAT HAPPENED TO DEFINED CONTRIBUTION ACCOUNTS AT RETIREMENT?

Percentage of respondents*

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*Based upon respondents’ recall. Responses are from a survey of employees retiring between 2002 and 2007 who were interviewed in the fall of 2007.
Note: Components do not add to 100 percent because of rounding.
Source: Defined Contribution Plan Distribution Choices at Retirement

FIGURE 7.15

Disposition of Accumulated Defined Contribution Account Balances
at Retirement

Percentage of total accumulated DC account balances1, 2

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1Based upon respondents’ recall. Responses are from a survey of employees retiring between 2002 and 2007 who were interviewed in the fall of 2007.
2The sum of DC balances is based on reported or estimated dollar amount in the DC plan from which the individual retired (between 2002 and 2007). Respondents who chose to receive some or all of their account balance in installments are not included.
3Respondents who annuitized some or all of their DC balance reported the amount of their annuity income. Using the respondent’s age, gender, marital status, and annual annuity payment, ICI estimated the account balance amount that would be consistent with a market-priced nominal annuity.
Source: Defined Contribution Plan Distribution Choices at Retirement

Households that own IRAs tend to preserve their IRA assets as long as possible. In May 2008, ICI surveyed households that owned IRAs and asked a series of questions about withdrawals. Of households with a traditional IRA in 2008, 22 percent reported taking a withdrawal in tax-year 2007. Withdrawals were typically modest: the median withdrawal was $9,000 and nearly 30 percent of withdrawals totaled less than $2,500. The median ratio of withdrawals to account balance was
6 percent. Typically, withdrawals from traditional IRAs were taken to fulfill required minimum distributions (RMDs). The RMD is a percentage of the IRA account balance, with the percentage based on life expectancy. Traditional IRA owners aged 70½ or older must withdraw a minimum amount each year or pay a penalty for failing to do so. Sixty-four percent of individuals who took withdrawals
did so to meet RMDs.

Because current withdrawal activity may not be a good indicator of future withdrawal activity, ICI also asked about future plans. Among traditional IRA–owning households in 2008 that did not take a withdrawal in tax-year 2007, 61 percent said that they were unlikely to take a withdrawal before age 70½ (Figure 7.16).

FIGURE 7.16

LIKELIHOOD OF WITHDRAWING FROM TRADITIONAL IRA BEFORE AGE 70½

Percentage of traditional IRA–owning households in 2008 that did not take a withdrawal in tax-year 2007

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Source: Fundamentals, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2008”

Mutual Funds’ Role in Households’ Retirement Savings

At year-end 2008, mutual funds accounted for $3.1 trillion, or 22 percent, of the $14.0 trillion U.S. retirement market (Figure 7.17). The remaining $10.8 trillion of year-end 2008 retirement market assets were managed by pension funds, insurance companies, banks, and brokerage firms.

FIGURE 7.17

MUTUAL FUNDS ACCOUNTED FOR 22 PERCENT OF RETIREMENT MARKET ASSETS

Trillions of dollars, year-end, 2000–2008

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*Data are preliminary.
Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division

The $3.1 trillion in mutual fund retirement assets represented 33 percent of all mutual fund assets at year-end 2008. Retirement savings accounts were a significant portion of long-term mutual fund assets (47 percent), but were a relatively minor share of money market fund assets (11 percent).

Mutual fund retirement assets primarily come from two sources: IRAs and employer-sponsored DC plans, such as 401(k) plans. Investors held roughly the same amount of mutual fund assets in IRAs as they did in employer-sponsored DC plans. At year-end 2008, IRAs held $1.6 trillion in mutual fund assets, and employer-sponsored DC plans had $1.5 trillion (Figure 7.18). Among DC plans, 401(k) plans were the largest holder of mutual funds, with $1.1 trillion in assets (Figure 7.19). At year-end 2008, 403(b) plans held $259 billion in mutual fund assets, 457 plans held $51 billion, and other DC plans held $142 billion.

FIGURE 7.18

MUTUAL FUND RETIREMENT ACCOUNT ASSETS

Billions of dollars, year-end, 1995–20081

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1Data are preliminary.
2DC plans include 401(k) plans, 403(b) plans, 457 plans, Keoghs, and other DC plans without 401(k) features.
Note: Components may not add to the total because of rounding.

Types of Mutual Funds Used by Retirement Plan Investors

Of the $3.1 trillion in mutual fund retirement assets held in IRAs, 401(k) plans, and other retirement accounts at year-end 2008, $1.8 trillion, or 57 percent, were invested in domestic or foreign equity funds (Figure 7.19). Domestic equity funds alone constituted about $1.4 trillion, or 44 percent, of mutual fund retirement assets. By comparison, about 39 percent of overall fund industry assets—including retirement and nonretirement accounts—were invested in domestic and foreign equity funds at year-end 2008.

FIGURE 7.19

BULK OF MUTUAL FUND RETIREMENT ACCOUNT ASSETS INVESTED IN EQUITIES

Billions of dollars, year-end 20081

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1Data are preliminary.
2Hybrid funds invest in a mix of equities and fixed-income securities. The bulk of lifecycle and lifestyle funds is counted in this category.
3Other DC plans include 457 plans, Keoghs, and other DC plans without 401(k) features.
Note: Components may not add to the total because of rounding.

At year-end 2008, approximately $837 billion, or 27 percent, of mutual fund retirement assets were invested in fixed-income funds (bond or money market funds). Bond funds held $415 billion, or 13 percent, of mutual fund retirement assets, and money market funds accounted for $422 billion, or 13 percent. The remaining $527 billion, or approximately 17 percent, of mutual fund retirement assets were held in hybrid funds, which invest in a mix of equity and fixed-income securities.

LIFESTYLE AND LIFECYCLE FUNDS. Lifestyle and lifecycle funds, generally included in the hybrid fund category, have grown in popularity among investors and retirement plan sponsors in recent years. Lifestyle funds maintain a predetermined risk level and generally use words such as “conservative,” “moderate,” or “aggressive” in their names to indicate the fund’s risk level. Lifecycle funds follow a predetermined reallocation of risk over time to a specified target date, and typically rebalance their portfolios to become more conservative and income-producing by the target date, which is usually indicated in the fund’s name.

Assets in lifestyle and lifecycle funds totaled $340 billion at the end of 2008 (Figure 7.20), down from $421 billion at year-end 2007. Lifestyle funds’ assets were down 26 percent in 2008, declining from $238 billion to $176 billion. Assets of lifecycle funds were down 10 percent in 2008, decreasing from $183 billion to $164 billion. The bulk (87 percent) of lifecycle fund assets was held in retirement accounts, compared with 43 percent of lifestyle fund assets.

FIGURE 7.20

LIFECYCLE AND LIFESTYLE FUND ASSETS BY ACCOUNT TYPE

Billions of dollars, year-end, 1998–20081

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1Data are preliminary.
2A lifecycle mutual fund is a hybrid fund that typically rebalances to an increasingly conservative portfolio as the target date of the fund, which is usually included in the fund’s name, approaches.
3A lifestyle mutual fund maintains a predetermined risk level and generally uses words such as “conservative,” “aggressive,” or “moderate” in the fund’s name.
Note: Components may not add to the total because of rounding.

Mutual Funds’ Role in Households’ Education Savings

According to the Federal Reserve Board’s 2007 Survey of Consumer Finances, about 12 percent of all U.S. households considered future education expenses their most important motivation for saving, compared with 11 percent of households in 2001. In addition, ICI research finds that 25 percent of households that owned mutual funds in 2008 cited education as a financial goal for their fund investments. Nevertheless, the demand for education savings vehicles has been historically modest since their introduction in the 1990s, partly because of their limited availability and investors’ lack of familiarity with them. The enactment of EGTRRA in 2001 enhanced the attractiveness of both Section 529 plans and Coverdell Education Savings Accounts (ESAs)—two education savings vehicles—by allowing greater contributions and flexibility in the plans. The enactment of the PPA in 2006 made permanent the EGTRRA enhancements to Section 529 plans.

Assets in Section 529 savings plans fell 21 percent in 2008, decreasing from $112.5 billion at year-end 2007 to $89.4 billion by year-end 2008 (Figure 7.21). The number of accounts was 8.9 million, and the average account size was approximately $10,000 at year-end 2008.

FIGURE 7.21

SECTION 529 SAVINGS PLAN ASSETS

Billions of dollars, year-end, 1998–2008

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Note: Data were estimated for a few individual state observations in order to construct a continuous time series.
Sources: Investment Company Institute and College Savings Plans Network

In ICI’s Annual Mutual Fund Shareholder Tracking Survey, it is possible to identify households saving for college through 529 plans, Coverdell ESAs, or mutual funds (Figure 7.22). As a group, these households saving for college tended to be headed by younger individuals (58 percent were younger than 45). Heads of these households, had a range of educational attainment: 47 percent had not completed college and 53 percent had college degrees or higher education. In addition, they represented a range of household incomes: 41 percent had household income less than $75,000; 18 percent earned between $75,000 and $99,999; and 41 percent had household incomes of $100,000 or more. Almost three-quarters of these households had children (younger than 18) still in the home; nearly half had more than one child.

FIGURE 7.22

DEMOGRAPHICS OF HOUSEHOLDS SAVING FOR COLLEGE

Percentage of U.S. households saving for college,1 May 2008

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1Households saving for college are households that own education savings plans (Coverdell ESAs or 529 plans) or responded that paying for education was one of their financial goals for their mutual funds.
2Head of household is the sole or co-decisionmaker for household saving and investing.
3Total reported is household income before taxes in 2007.
4The number of children reported is children younger than 18 living in the home.