Long-Term 401(k) Balances Up Despite Recession

After rising for five years, the average 401(k) retirement account fell 24.3% in 2008, according to an analysis of participants in the Employee Benefit Research Institute/Investment Company Institute 401(k) database.

However, from year-end 2003 through year-end 2008, the average account balance among a group of “consistent” participants grew 41.6%, rising from $61,106 at year-end 2003 to $86,513—an average annual growth rate of 7.2%, the study report said. The median 401(k) account balance among the consistent group also grew, rising 71.3% from $25,507 in 2003 to $43,700 in 2008—an average annual growth rate of 11.4% over the period.

About two in five, or six million, of the 401(k) participants with accounts at the end of 2003 in the EBRI/ICI 401(k) database had accounts at the end of each year from 2003 through 2008—making up the group of consistent participants (or a longitudinal sample), which removes the effect of participants and plans entering and leaving the database, the report says.

The group was similar with respect to age and tenure to the entire database at year-end 2003, but by year-end 2008, the group had a minimum tenure of five years and was slightly older in age composition when compared with the year-end 2008 cross-sectional database.

The consistent group’s account balances tended to be higher compared with account balances in the overall database at year-end 2008. According to the report, at year-end 2008, the average 401(k) account balance of the consistent group was almost double the average account balance of $45,519 among participants in the entire database. The median 401(k) account balance among the consistent participants was nearly three-and-one-half times the median account balance of $12,655 among participants in the entire database.

For both the consistent group and the overall database, younger participants or those with shorter job tenure tended to have smaller account balances, while those who were older or had longer job tenure tended to have higher account balances. Within the consistent group, participants in their 20s at year-end 2008 had an average account balance of $18,598, compared to an average of $125,052 for participants in their 60s.

However, the report said participants who were younger or had fewer years of tenure experienced the largest increases in account balances during the five-year period. The report explained that because younger participants’ account balances tended to be small, contributions produced significant account balance growth. In contrast, the average account balance of older participants or those with longer tenures showed more modest growth since investment returns, rather than annual contributions, generally account for most of the change in accounts with larger balances.

In addition, participants in their 60s tend to have a higher propensity to make withdrawals.

Majority of 401(k) Assets Still Invested in Equities

The analysis of the EBRI/ICI 401(k) database found the bulk of 401(k) assets continued to be invested in stocks. On average, at year-end 2008, 56% of 401(k) participants' assets was invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. Forty-one percent of assets were in fixed-income securities such as stable value investments and bond and money market funds.

Three-quarters of 401(k) plans in the database included lifecycle funds in their investment lineup at year-end 2008, according to the report. Nearly 7% of assets were invested in lifecycle funds and 31% of 401(k) participants held lifecycle funds.

Across all age groups, more new or recent hires invested their 401(k) assets in balanced funds, including lifecycle funds. At year-end 2008, 36% of the account balances of recently hired participants in their 20s were invested in balanced funds, compared to 28% in 2007, and about 7% in 1998. Almost 23% of the account balances of recently hired participants in their 20s were invested in lifecycle funds, compared to almost 19% at year-end 2007.

Recently hired 401(k) participants were also less likely to hold employer stock, contributing to a trend among all 401(k) participants who continued to seek diversification of their investments. The share of 401(k) accounts invested in company stock continued a steady decline that started in 1999, falling by nearly 1% to 9.7% in 2008.

Participants Keep Savings Intact

Despite the recent hard financial times, the analysis of the EBRI/ICI 401(k) database found participants' 401(k) loan activity was stable. In 2008, 18% of all 401(k) participants eligible for loans had a loan outstanding against their 401(k) account, the same percentage as at year-end 2007 and year-end 2006. The ratio of loans outstanding to participants' remaining account balance was 16%, on average, at year-end 2008, similar to the year-end 2002 level.

Fifty-nine percent of the 401(k) plans for which loan data was available in the 2008 EBRI/ICI 401(k) database offered a plan loan provision to participants. The loan feature was more commonly associated with large plans: 93% of plans with more than 10,000 participants included a loan provision, compared to 33% of plans with 10 or fewer participants.

The study report said outstanding loan balances were more likely among participants in their 30s, 40s, or 50s. Participants with five or fewer years of tenure or with more than 30 years of tenure were less likely to use the loan provision than other participants. Only 12% of participants with account balances of less than $10,000 had loans outstanding.

In the 13 years that the database has been tracking loan activity among 401(k) plan participants, there has been little variation. On average, less than one-fifth of 401(k) participants with access to loans had a loan outstanding over the past 13 years.

The database includes 24 million 401(k) plan participants in 54,765 employer-sponsored 401(k) plans, holding more than $1 trillion in assets.

The study report is available here.