The increase reflects both employer and worker contributions, according to joint research from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI), as well as investment returns, withdrawals and loans. As the study points out, this relatively strong yearly growth comes despite a 34.7% drop in the average 401(k) account balance experienced during the depths of the most recent financial crisis, circa 2008.
The study, called “What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2007–2012,” also discovered that the average account balance of “consistent participants” was 67% higher than the average account balance among all participants in the EBRI/ICI 401(k) database. Sarah Holden, ICI’s senior director of retirement and investor research and coauthor of the study, says this result suggests that contributing to a 401(k) plan consistently is likely to result in higher account balances—even during periods of substantial market volatility.
This study also revealed that slightly more consistent 401(k) participants—i.e., those with accounts during each year in the sample period—held target-date funds (TDFs) at year-end 2012 than did so at year-end 2007. According to Jack VanDerhei, EBRI research director and coauthor of the study, almost one-third of those holding target-date assets invested all of their 401(k) balances in TDFs.
“The data confirms the continuing important role of target-date funds in 401(k) plans, revealing that a substantial core of consistent 401(k) participants who held at least some target-date fund assets in their account before the financial crisis, still did so at year-end 2012,” he explains.
When analyzing the group of consistent 401(k) participants at year-end 2012, the data showed that 4.5% had added a TDF allocation since 2007. At year-end 2007, 27.6% of 401(k) participants in the consistent sample owned target-date funds. By year-end 2012, ownership in the consistent sample had increased to 32.1%. More than two in five (43.7%) consistent 401(k) participants in their 20s had target-date funds in their 401(k) accounts at year-end 2012, compared with 28.4% of consistent 401(k) participants in their 60s.
Looking at the wider sample, ownership of TDFs in 2012 had increased considerably to reach 41%, an increase of 15.9 percentage points since 2007. Because TDFs are often used as a default investment option in 401(k) plans with automatic enrollment, some of their growth is related to the spread of automatic enrollment in recent years, the study says.
On average, around three-fifths of 401(k) participants’ assets were invested in equities, either through equity funds, the equity portion of target-date funds, the equity portion of non-target date balanced funds, or company stock. Younger 401(k) participants tend to have higher concentrations in equities than older 401(k) participants, according to the study.
Trends in the consistent group’s account balances highlight the accumulation effect of ongoing 401(k) participation, the study shows. At year-end 2012, 15.5% of the consistent group had more than $200,000 in their 401(k) accounts at their current employers, while another 16.2% had between $100,000 and $200,000. In contrast, in the broader EBRI/ICI 401(k) database, just 8.5% of participants had accounts with more than $200,000, and 9.5% had between $100,000 and $200,000.
A full copy of the study is available here.