New 401(k) Participants Favor Lifestyle/Lifecycle Funds

July 31, 2007 ( - The annual Employee Benefit Research Institute (EBRI)/Investment Company Institute (ICI) analysis of 401(k) plan data shows more new or recent hires are investing their 401(k) assets in balanced funds, including lifestyle and lifecycle funds.

At the end of 2006, 24% of the account balances of recently hired participants in their twenties was invested in balanced funds, compared with 19% in 2005 and about 7% in 1998, the analysis said. In contrast, the study found recently hired 401(k) participants are less likely to hold a high concentration of their account balance in company stock.

Equity in 401(k) Plans

The 2006 EBRI/ICI database reveals that, on average, 49% of participant account balances are allocated to equity funds. However, individual asset allocations vary widely across participants. The data shows nearly 36% of participants hold no equity funds, while 21% of participants hold more than 80% of their balances in equity funds.

The percentage of participants holding no equity funds varies with age, with 47% of participants in their twenties, 31% of participants in their forties, and 42% of participants in their sixties holding no equity funds, the report said. EBRI and ICI also noted the percentage of participants holding no equity funds tends to fall as salary increases and pointed out that participants with no equity fund balances may still have exposure to the stock market through company stock or balanced funds.

The bulk of 401(k) assets is invested in stocks, the study found. On average, as of the end of 2006, about two-thirds of 401(k) participants’ assets were invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. About one-third was in fixed-income securities such as stable value investments and bond and money market funds.

In the 2006 EBRI/ICI database, 55% of participants are in their thirties or forties, while 12% of participants are in their twenties and 8% are in their sixties. The median age of the participants in the database is 44 years, the same as in 2005. Thirty-three percent of the participants have five or fewer years of tenure, while 6% have more than 30 years of tenure, the report said. The median tenure at the current employer is eight years, also the same as in 2005.

The average 401(k) retirement account rose for the fourth consecutive year, propelled by strong stock market returns, according to EBRI/ICI. The average 401(k) account increased 17% in 2006, the data showed.

Looking at consistent participants in the EBRI/ICI 401(k) database over the seven-year period from 1999 to 2006, the average 401(k) account balance increased at an annual growth rate of 8.7% over the period, to $121,202 at year-end 2006, and the median 401(k) account balance increased at an annual growth rate of 15.1% over the period, to $66,650 at year-end 2006. The report pointed out the period included one of the worst bear markets for stocks since the Great Depression.

Plan Loans

The other major characteristic of 401(k) plans looked at in the analysis is plan loans. In the 2006 EBRI/ICI database, 85% of participants are in plans offering loans. However, relatively few participants make use of this feature. Only 18% of those eligible for loans had 401(k) plan loans outstanding at the end of 2006.

Loan activity varies with age, tenure, account balance, and salary, the analysis shows. Of those participants in plans offering loans, the highest percentages of participants with outstanding loan balances are among participants in their thirties, forties, or fifties. In addition, participants with five or fewer years of tenure or with more than 30 years of tenure are less likely to use the loan provision than other participants, the report said. Only 11% of participants with an account balance less than $10,000 have loans outstanding.

Among participants with outstanding loans at the end of 2006, the average unpaid balance was $7,292.

As of December 31, 2006, the EBRI/ICI database included statistical information about 20 million 401(k) plan participants, in 53,931 employer-sponsored 401(k) plans, holding $1.228 trillion in assets. The 2006 EBRI/ICI database covers 40% of the universe of 401(k) plan participants, 12% of plans, and 46% of 401(k) plan assets.

The complete report is here .