Who owns mutual funds in the US?

Who owns mutual funds?

The Investment Company Institute, the trade association for mutual fund management companies, has done two pieces of recent research on this topic.

One seeks to create a picture of the typical mutual fund holder in the United States.

The second tries to figure out how fund holders behaved during the financial crisis.  It does this in two ways:

by surveying the holders themselves, and

by surveying the administrators of work-related defined benefit retirement plans about the behavior of plan members.

The owners

According to the ICI, the typical mutual fund holder is a head of household aged 50.  He/she is employed, has spent at least some time in college and has household income of $80,000—about 50% more than the US norm.  (About three-quarters of holders are working; most of the rest are retired.)   The large majority have been holding mutual funds for a long time, with 55% having bought their first fund more than 15 years ago.

Households are divided into three roughly equal groups:

–those who own mutual funds solely through employer-provided retirement plans;

–those who own funds exclusively outside employer plans, and

–those who hold mutual funds in both forms.

As more companies (practically everyone other than government employees, nowadays) have shifted the risk of paying for employees’ retirement from the firm to the employees themselves—that is, have shifted from defined benefit to defined contribution plans—people are increasingly getting their introduction to mutual funds from company-sponsored pension plans.  Younger mutual fund households tend to hold the funds primarily through work.

Of these households, 44% have the lion’s share (over 75%) of their wealth in mutual funds, another 22% have more than half their assets in funds.

Stock funds are the most popular choices, with 77% of mutual fund households owning them.  About two-thirds own money market funds.  Half own either hybrid/balanced or bond funds.

Almost everyone cites retirement saving as a reason for owning mutual funds.  I had thought that funding  college for children came a close second.   But in 2009 at least, this goal is far from the thoughts of the average holder.  It comes in at #4, cited by about a quarter of households.  College was beaten handily by “reduce taxable income” (49%) and “emergency” (46%).

Mutual fund-owning households seem to be well diversified.  They typically own several funds.  43% of them also own individual stocks, 30% have investment real estate and 28% own variable annuities.

Almost everyone who owns funds outside an employer plan says they’ve bought them based on the advice of a professional financial planner.

What about non-owners?

From this survey, we can’t tell much about non-owners, other than that they have lower income than holders.  It’s a reasonable guess, however, that they’re less wealthy, less well-educated and, if they are saving at all, they have been doing so for a shorter period than mutual fund owners.  This general impression is in part confirmed by the surveying done to gauge investor response to the financial crisis.

The pension plan administrator survey

A recent ICI report details information gathered from the administrators of company-sponsored defined contribution pension plans about member activity (1) during full-year 2008 and (2) during the first nine months of 2009.

The results:

–almost no one (3.8% of members in 2008 and 5% in 2009) stopped making voluntary 401k contributions during the financial crisis

–about three-quarters of members maintained the same asset allocation for their balances through 2008 and 2009  as they had before the financial crisis began.  The surveys show that a total of 25.3% changed asset allocation either in 2008 (14.4%) or 2009 (9.9%), but not how many did so in both years, or if there were a pattern of becoming more conservative or more aggressive in the change.

–over three-quarters maintained the same asset allocation for their new contributions as they had in 2007 (12.4% changed in 2008 and 9.8% in 2009).  Again, no information about multi-year changers or about the direction of change.

Steady as a rock at work…

In other words, plan members have been heroes of stability and common sense during one of the most trying periods for investors during their lifetimes. And this conclusion comes, not from the individuals’ subjective self-assessment, but from a report of the orders the gave to their pension administrators.

…but hiding under the desk at home

How does this account square, though, with the mutual fund inflow and outflow data that the ICI also provides, which show frenetic trading in and out of stock funds, a pattern of net outflows from US-oriented funds, and a mad rush to buy bond funds despite record-low interest rates?

The obvious conclusion—I’m almost, but not quite, embarrassed, as I write this—is that all the craziness is taking place in the mutual fund world outside the defined contribution pension arena.  This, I think, implies the frantic trading is being done by older, wealthier individuals.

This would make some intuitive sense, since the issue of supporting yourself post-retirement is a more real—therefore, more frightening–issue for Baby Boomers than for Generations X or Y.  The direction of the net asset changes, toward avoiding further losses rather than positioning to make future gains, also fits, not as a shrewd investment strategy (one like “buy low, sell high”), but as a panicky knee-jerk reaction.

What’s particularly odd is that 80% of such individuals told the ICI that they bought funds apart from work only after getting professional financial planning of some sort.  Apparently, not much of that stuck.

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