EBRI: Bears Merely Scratched 401(k) Balances

September 12, 2003 (PLANSPONSOR.com) - Despite losses in the equity markets, asset diversification and continuing contributions show 401(k) participants have not given up on long-term approaches in their retirement vehicle.

The average 401(k) asset allocation has remained essentially unchanged from mid-2000, with the average account balance dropping only 10% since the middle part of 1999 to $57,668. The overall account balance has offset broad equity index declines through diversification in 401(k) plans and continued participation, according to data released by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI). 

A check of EBRI’s database of 15.5 million active 401(k) plan participants found that approximately two-thirds of the participants who had accounts at the end of 1999 still had a 401(k) at year-end 2002. 

Allocated Resources

Overall, 62% of the monitored plan balances were invested either directly or indirectly in equities, with allocations spread across equity funds, company stock, and the equity portion of balanced funds.  The percentage of equity investments has declined during 2000 and 2001, but still has increased when compared to 1996.  At the end of 2002, equity funds represented 40% of participant assets, compared with only 44% in 1996.  Comparatively, in 1999, which represented the high for percentage of equity assets in plan accounts, equity funds represented 53% of participant assets. The research attributes much of the movement to overall equity prices, which showed a period of steady increase from 1996 to 1999, but decline during the recent three-year bear market.

Other 401(k) assets were spread between 16% in company stock, 16% in guaranteed investment contracts (GICs) and other stable value funds, 11% in bond funds, 9% in balanced funds and 6% in money funds.

Younger investors have tended to favor equity funds, contrasting the older 401(k) investor’s penchant for fixed-income assets.  The table below shows the difference in allocation held by the average twenty-something participant and individuals in their sixties:

align=”center”> Twenties

align=”center”> Sixties

Equity Funds

align=”center”> 50.5%

align=”center”> 30.3%

Balanced Funds

align=”center”> 11.0%

align=”center”> 8.0%

Bond Funds

align=”center”> 9.1%

align=”center”> 13.7%

Money Funds

align=”center”> 6.9%

align=”center”> 7.3%

GICs & Stable Value

align=”center”> 7.3%

align=”center”> 26.7%

Company Stock

align=”center”> 13.6%

align=”center”> 12.7%


align=”center”> 0.7%

align=”center”> 1.0%


align=”center”> 0.9%

align=”center”> 0.4%

Company stock investments represent the most mixed category of the study.  While participants in their twenties invest 13.8% of their plan balance in company stock, the forty-something demographic has 17.6% and participants in their sixties have 12.7%.

The report also showed participant investing behavior may be influenced by the breadth of available investment options.  Not surprisingly, participants take advantage of the different investment choices.   Plans that offer only equity, bond, money funds and/or balanced funds see 54.8% of plan assets in equity, 19.1% in bond, 12.3% in balanced and 11.1% in money funds. 

Comparatively, plans that run the gamut of investable categories see much great diversification.  The data found that participants tend to hold a lower share of their accounts in equity funds when the plan offers company stock as an investment option.  In plans that offer both company stock and stable value products, company stock appears to displace equity and balanced fund holdings, and GICs and other stable value funds appear to displace other fixed-income investments.  The makeup of those plans is:

  • 32.1%, Equity funds
  • 24.1%, Company stock
  • 26.5%, GIC and stable value funds
  • 8.2%, Balanced funds
  • 5.3%, Bond funds
  • 2.7%, Money funds.

At the end of 2002, the average account balance among all 401(k) participants stood at $57,668.   Not surprisingly, lower account balances were primarily concentrated among younger investors with shorter tenures.   EBRI/ICI's database showed workers in their twenties had an average account balance of $15,035, increasing to $35,282 for workers in their thirties and $61,033 for those in their forties.

Conversely, the larger balances were concentrated in older, longer tenured workers who have amassed their retirement balances through contributions and compounding of investment returns.   Balances of $88,332 were noted for worker in their fifties, while workers in their sixties had an average balance of $106,689.

The average 401(k) account balance of the consistent group of participants, those who held accounts from 1999 through 2002, edged down 0.9% from 1999 to 2000 declined 1.3% in 2001,and then fell 7.9% in 2002.   Thus the cumulative account balance has declined 10% since 1999, from $64,074 at the end of 1999 to 2002's $57,668.    Comparatively, over the same period the S&P 500 declined 38%.  

Overall, EBRI/ICI attributes the aggregate accumulation in participant account balances to three factors:

  • new contributions by the participant and/or employer
  • total investment return on account balances
  • withdrawals, borrowing, and loan repayments.

Examining the role of participant age, the average account balance of participants in their twenties rose about 57% between the end of 1999 and the end of 2002, while the average account balance of participants in their sixties fell about 25.6% during the same period. 

The results of the latest survey further support data in a previous EBRI study that concluded continual 401(k) participation can lead to a greater balance at the time of retirement for younger workers (See  Continual 401(k) Participations Pays Larger Dividends ).  In that study scenarios were given to project total retirement savings for workers in their late 20s in 2000, who contribute continuously to their 401(k) plans until expected retirement (between 2035 and 2039). The study found that the "replacement rate" of preretirement income - which also includes expected Social Security benefits under the current system - could exceed 100% of preretirement income for those with low earnings.

However, situations where a 401(k) was not offered or participation was lax, preretirement replacement rates drop to 42% for the highest quarter of 401(k) participants and 75% for the lowest.  This results in a conclusion that younger workers contributing to a 401(k) can expect median initial annual retirement benefits of 83% to 85% of their working income

Lending Out

The vast majority (84%) of 401(k) participants is in a plan that allows borrowing privileges.  However, as has been the case in the seven years EBRI has tracked 401(k) loan activity, only a small amount have loans outstanding. Among participants in plans offering loans, only 16% had loans outstanding at the end of 2002.

For those with outstanding loans at the end of 2002, the level of unpaid balance was 14% of the net account balance, representing an outstanding loan of $6,659. 

A copy of the full report can be obtained from ICI at  http://www.ici.org/pdf/per09-05.pdf .