401(k) Investors Rode 2009 Market Advances

November 23, 2010 (PLANSPONSOR.com) – Long-term 401(k) participants took a big hit to their accounts in 2008 but otherwise enjoyed an average 31.9%-advance in 2009, according to a new study.

The Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) said in a news release that was one result of their joint study of a database on 20.7 million 401(k) participants including 4.3 million who maintained their accounts with the same plan from year-end 2003 through year-end 2009.

The 2009 showing was consistent with the pattern of steady account balance increases from 2003 to 2007 and only interrupted by the 2008 performance driven by the market downturn when the long-term 401(k) investors saw an average 27.8% decline.

“Looking at consistent participants provides insights into the powerful impact of ongoing participation in 401(k) plans,” said Sarah Holden, ICI senior director of retirement and investor research, in the news release. “Retirement savers, by continuing to invest paycheck-by-paycheck, saw the benefits of being in the market in 2009, as stock values generally climbed during the year.”

The average 401(k) account showed an average annual growth rate of 10.5%, reaching $109,723 at year-end 2009 – up from $61,106 at year-end 2003, according to the study. The changes in 401(k) participant account balances reflect ongoing worker contributions, employer contributions, investment gains and losses, and loan or withdrawal activity, which also impact the 31.9% increase in the average account balance in 2009. By way of comparison, in 2009, the Standard & Poor’s 500 stock index rose 26.5%, while the Russell 2000 index rose 27.2%. The Barclays Capital U.S. Aggregate Bond Index rose by about 5.9%.

Examining the entire 20 million plus participant database, the study found that at year-end 2009, 21% of 401(k) participants in plans offering loans had loans outstanding—up from 18% at both year-end 2008 and year-end 2007. At year-end 2009, 89% of 401(k) participants were in plans offering loans.

Diversified Accounts 

The full database analysis also showed that 401(k) participants continued to seek diversification of their investments. The share of 401(k) accounts invested in company stock continued to shrink, falling by half of a percentage point to 9.2% in 2009, according to a news release. That continued a steady decline that started in 1999. Recently hired 401(k) participants contributed to this trend: they generally were less likely to hold employer stock.

The analysis found that the bulk of 401(k) assets continued to be invested in equities. On average, at year-end 2009, 60% of 401(k) participants’ assets were invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. Thirty-six percent were in fixed-income securities such as stable value investments and bond and money funds. In 2009, more than three-quarters of 401(k) plans included target-date funds in their investment lineup.

At year-end 2009, nearly 10% of the assets in the database were invested in target-date funds and 33% of 401(k) participants held target-date funds.

“401(k) participants continued to embrace target-date fund investing in 2009,” said Jack VanDerhei, EBRI director of research, in the news release. “Although target-date funds represent only one-tenth of 401(k) assets, the data highlight the significant role that they play in individual participants’ accounts, particularly recently hired and younger employees who are increasingly using target-date funds to save for retirement.”

According to the analysis, 401(k) investors tended to be more likely to hold balanced or target date funds compared with earlier time periods. For example, at year-end 2009, about 42% of the account balances of recently-hired participants in their 20s was invested in balanced funds, compared with 36% in 2008 and about 7% in 1998. At year-end 2009, 31% of the account balances of recently hired participants in their 20s was invested in target-date funds, compared with almost 23% at year-end 2008.

The research report is here.