Employees Still Show Faith in 401(k)

February 28, 2003 (PLANSPONSOR.com) - Despite losses in the equity markets, 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 4% since the middle part of 1999 to $58,785.    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).  

At the end of 2001, roughly 45 million American workers held 401(k) plan accounts with a total of $1.75 trillion in assets.    Additionally, EBRI’s database of 14.6 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 2001.  

Allocated Resources

Overall, 70% 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 2001, equity funds represented 48% 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.

Other 401(k) assets were spread between 17% in company stock, 14% in guaranteed investment contracts (GICs) and other stable value funds, 8% in balanced funds, 8% in bond funds and 5% 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:



Equity Funds



Balanced Funds



Bond Funds



Money Funds



GICs & Stable Value



Company Stock









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 18.1% and participants in their sixties have 14.0%.

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 64.8% of plan assets in equity, 14.3% in bond, 9.7% in money, and the remaining 9.5% in balanced 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:

  • 39.0%, Equity funds
  • 25.3%, Company stock
  • 22.6%, GIC and stable value funds
  • 6.4%, Balanced funds
  • 3.4%, Bond funds
  • 2.5%, Money funds

At the end of 2001, 45% of plan participants had accounts with their employer of less than $10,000 while 11% had balances greater than $100,000.   Not surprisingly, lower account balances were primarily concentrated among younger investors with shorter tenures, with the larger balances concentrated in older, longer tenured workers who have amassed their retirement balances through contributions and compounding of investment returns.

The average 401(k) account balance of the consistent group of participants was essentially unchanged from 1999 to 2000 and then declined 3.8% in 2001, from $61,125 at the end of 2000 to 2001's $58,785 average balance.  Offsetting the 12% decline in stock prices seen in 2001 were continued contributions to 401(k) plans and the diversification of plan assets. 

Examining the role of participant age, the average account balance of participants in their twenties rose about 27% in 2000 and another 16% in 2001, while the average account balance of participants in their sixties fell about 6% in 2000 and an additional 9% in 2001.  

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 s cenarios 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 (80%) of 401(k) participants are in plans that allow borrowing privileges.   However, as has been the case in the six 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 2001.

For those with outstanding loans at the end of 2001, the level of unpaid balance was 14% of the net account balance, representing an outstanding loan balance of $6,644.  

A copy of the full report can be obtained from  ICI .