Jan. January 1999 Feb. EBRI Issue Brief (ISSN 0887-137X) is published monthly at $300 per year or is included as part of a membership subscription by the Employee Benefit Research Institute, 2121 K Street, NW, Suite 600, Washington, DC 20037-1896. Periodicals postage EBRI Chart 8 Mar. Table 3 rate paid in Washington, DC. POSTMASTER: Send address changes to: EBRI Issue Brief Chart 9 , 2121 K Street, NW, Suite 600, Table 5 Table 1 Chart 10 Table 7 Chart 2 Table 6 Chart 13 Table 8 Chart 16 Table 2 Chart 3 Impact of Age and Tenure on Account Balance, EMPLOYEE Washington, DC 20037-1896. Copyright 1999 by Employee Benefit Research Institute. All rights reserved, No. xxx. Asset Allocation, by Age Table of Impact of Age and Tenure on Account Balance, Asset Allocation for Total Plan Balances Allocation Distribution of Participant Asset Allocation Distribution for Participants With No Equities Impact of Company Stock on Asset Allocations, by Age Cohort Plans, Participants, Assets, and Average Account Impact of Plan Size on Avail Percentage of Participants With Zero Equities ability of Plan Loans Percentage of Eligible Participants With Loans, by Account Balance Loan Ratios for Particip Plans, Participants, Assets, and Average Account Balances ants With Loans, by Account Balance Distribution of Account Balances Participants With Account Balances Apr. BENEFIT The EBRI/ICIParticipants With Account Balances Account Balances to Equities Balances, by Plan Size (measured in participants) Who Have Exposure to Company Stock by Plan Size (measured in plan assets) 401(k) Plan Asset Allocation, AgeLess than $10,000 Equity Bond Company Money Balanced Other Stable Equity Bond Company Money Balanced Other Stable Over $100,000 or to Balanced Funds RESEARCH Age Equity Bond Company Money Balanced Other Stable 100% 30% a Cohort Funds Funds Stock Funds Funds GICs a Value Funds Other Unknown Total Contents Funds Funds Stock Funds Funds GICs Value Funds Other Unknown Total database . . . is a Plan Size Total Plans Total Participants Total Assets Average Assets Plan Size Total Total Total Average Account May Cohort Funds Funds Stock Funds Funds GICs Value Funds Other 100% 40% 47.2% INSTITUTE 50% ® The Employee Benefit Research Institute (EBRI) was founded in 1978. Its mission is Zero < 20% 20%–80% 80% + Total (in total plan assets) 50% Plans Participants Assets Balances 20s 55.1% 5.8% 16.7% 5.2% 8.3% Table 2, Plans, Participants, Assets, and Average 7.8% 0.1% 0.8%Percentage With Company 0.3% 100% ho we are 80% to contribute to, to encourage, and to enhance the development of sound employee benefit W 25% Age Cohort 1–10 6,770 43,790 $ 789,854,771 $18,037 currently the most Panel A: Asset Allocation by Age Cohort for Participant-Directed Balances Stock and/or Balanced Funds 30s 51.2 5.6 19.6 4.8 8.1 9.0 0.4 0.6 0.6 100 Jun. Account Balances, and Loan Activity 35% 90% Text 45% Age Account Balances, by Plan Size (Measured in Plan Total 30.6% 6.9% 38.0% 24.5% 100.0% programs and sound public policy through objective research and education. EBRI is the only private, nonprofit, 20s 0% 9.5% 36.3% 16.8% 11.8% 22.4% 0.2% 2.4% Chart 6 0.6% 100.0% Employer Stock 45% 11–25 7,643 128,472 2,008,569,886 15,634 $0–$250,000 Only in Plans With Employer-Directed Contributions 13,497 229,821 Age $ 1,228,267,360 $ 5,344 40s 46.2 6.0 21.1 5.2 8.0 12.0 0.6 0.5 0.6 100 20s 19.1% 60% 30s 0 8.8 40.2 13.5 10.2 23.1 1.0 2.0 1.1 100.0 nonpartisan, Washington, DC-based organization committed exclusively to public policy research and education on Average Account Balance, by Age and by Tenure comprehensive Assets).......................................................................... 20s 8 Age Cohort 20% 50s 42.5 26–50 7.0 4,594 19.5 $250,000–$625,000 5.3 164,091 7.8 16.1 2,832,514,218 4,838 0.9 180,623 0.4 17,262 1,947,420,421 0.6 100 10,782 Introduction ..................................................................... 3 80% 20s 47.3% 1.0% 35.3% 2.0% 6.1% 8.1% 0% 0.1% 30% 40s 0 9.030s 40.1 11.7 9.2 26.6 1.2 1.2 0.9 100.0 Jul. Age 40% by Jack VanDer economic security and employee benefit issues. EBRI’s membership includes a cross-section of pension funds, hei, Russell Galer, Carol Quick, and John Rea 40% 20s 30s 44.7% 60s 33.9 9.2 15.0 6.1 7.2 Table 3, Asset Allocation, by Age 26.1 1.6 0.3 0.6 .................................. 100 10 $625,000–$1,250,000 2,805 180,226 2,495,608,783 13,847 51–100 3,261 231,939 4,988,806,516 21,509 30s 44.7 1.5 34.0 3.1 7.1 9.4 0 0.2 Summary .......................................................................... 50s 0 10.5 34.9 11.2 3 8.1 32.0 1.6 0.8 0.9 100.0 20s 28.3 4.4 37.4 29.9 40s 100.0 source of informa- businesses, trade associations, labor unions, health care providers and insurers, government organizations, and 40% All 44.0 6.8 19.1 5.4 7.8 15.1 0.830s 0.4 0.6 53.1 100 $180,000 40s 70% 40s 37.2 2.5 $1,250,000–$2,500,000 35.2 6.4 7.3 2,087 11.1 234,874 0 0.3 3,711,420,947 15,802 Table 4, Asset Allocation, by Age and Investment 15% 60s 101–2500 12.3 2,592 22.8 403,178 9.9 6.7 44.38,921,837,003 2.8 0.5 22,129 0.8 100.0 35% 25% Asset Allocation ........................................................... 3 Aug. 30s 26.6 service firms. 6.4 39.9 27.1 50s 100.0 35% 40s 55.6 50s 33.1 3.2 33.2 7.2 7.5 15.4 0 50s 0.4 All 0 10.3 33.5 $2,500,000–$6,250,000 11.8 8.3 32.5 1,869 1.7 1.0 398,075 0.9 100.0 7,289,773,894 18,313 GICs Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. 251–500 1,162 404,798 Menu 10,422,328,074 .......................................................................... 25,747 10 tion on individual 50s 56.1 40s 29.5 7.6 39.4 23.6 60s 100.0 Account Balances ........................................................ 4 $160,000 60s 20% 60s 31.7 3.0 26.1 8.2 6.6 23.7 0 0.7 15.1% 60% a 60s $6,250,000–$12,500,000 959 417,069 8,376,238,006 20,084 30% Equity Funds Guaranteed investment contracts. 20% 30% 60s 45.3 10% Tenure 501–1,000 697 496,358 13,956,922,190 28,119 Table 5, Impact of Company Stock on Asset Pennsylvania Press, 1997. tional Bureau of Economic Research, November 1, Sep. 50s 32.9 8.3 All 37.5 21.3 36.0 100.0 2.6 32.7 6.5 7.2 14.6 0 0.4 During the past balances, asset allocation, and loans. In 1996, the first Plan Loans ................................................................... 4 44% $12,500,000–$25,000,000 608 482,157 10,716,660,204 15 22,226 0–2 0 10.1 EBRI’s work advances knowledge and understanding of employee benefits and their 21.6 plan par 21.3 ticipants. 17.8 25.5 0.6 All 2.2 0.8 100.0 52.1 • Survey of Con- balance by tenure for each age group. The Asset allocation varies with age. have also been used to analyze participant activity and not to change during Of those 1998). During the same period, the number of 401(k) equity funds at all. However, of those and balanced funds assets. of the plan and permit the employee to make after-tax contributions. A participants having plan balances less than $10,000 Data provided for each participant included Comparison With Other 1,001–2,500 586 910,378 28,042,850,005 30,804 $140,000 60s 50% 46.2 8.3 29.7 15.7 100.0 Allocations, by Age Cohort ....................................... 11 Hewitt Associates. Survey Findings: 401(k) Trends and 1997. hat we do 0% two decades, year for which data are ready for analysis, the EBRI/ICI 401(k) Plan Development ................................................ $25,000,000–$62,500,000 5 25% 557 786,662 21,999,382,551 27,965 combinations of investment offerings, starting with a 25% W 2–5 0 10.0 22.4 17.6 15.8 30.9 0.7 2.2 0.5 100.0 The Employee Benefit Research Institute (EBRI) importance to the nation’s economy among policymakers, the news media and the public. and the Investment Company st 15% Panel B: Asset Allocation by Age Cohort for Total Balances employer contribu- the life of the con- 1– 11– 26– 51– 101– 251– plans, which were authorized in legislation passed by 501– 1,001– with no investments in equity funds, 2,501– 5,001– >10,000 Most of the 5% 2,501–5,000 241 845,642 32,126,231,300 37,990 sumer Finances to average account balance for each age group plans in the EBRI/ decision-making in 401(k) plans. One of the more fre- Younger participants tend to be more tend to borrow less frequently. differs the most from Oct. plan may be designed to permit a participant to with- participant date of birth, from which an age cohort was Table 6, Allocation Distribution of Participant Table 4 Experience, 1997. Lincolnshire, IL: Hewitt Associates, 5–10 0 9.4 28.5 16.6 11.0 Profit Sharing/401(k) Council of America. 31.4 0.6 Tenure 1.7 0.8 100.0 41 Annual Participant-Level Databases 401(k) retire- $62,500,000–$125,000,000 database appears to be broadly representative of the 248 727,182 21,839,715,621 30,033 Expansion of 401 (k) Plans It does this by conducting and publishing policy research, analysis, and special reports on employee benefits issues; ......................................... 10 25 50 100 5 250 500 1,000 2,500 5,000 10,000 in Plans With Employer-Directed Contributions Balanced Institute (ICI) have been collaborating for the past two years to collect data on partici- base group consisting of equity funds, bond funds, money 40% Tenure $120,000 8 tions. These 50s 5,001–10,000 125 860,392 32,621,053,291 more than one-half hold either 37,914 study asset alloca- tract and during concentrated in stock-related invest- Congress in 1978, increased from virtually zero to Asset Allocation, by Age and Investment Menu plans in the data- increases, almost without exception, as tenure • ICI database for quently used is the Survey of Consumer Finances (SCF). For those with outstanding loans at the end of 1996, 10–20 0 10.0 33.1 13.5 9.0 31.5 1.4 0– 0.5 2 1.1 100.0 40.0 the shares in plans draw funds from his or her account for hardship or to 20% assigned; 20% participant date of hire, from which a tenure $125,000,000–$250,000,000 Account Balances to Equities 141 630,730 23,946,646,100 ................................... Funds 7.8% 37,967 12 1997. Participants Survey of Profit Sharing and 401(k) Plans, Reflecting 10% holding educational briefings for EBRI members, congressional and federal agency staff, and the news media; and ment plans universe of 401(k) plans. Furthermore, it is by far the Features of 401 (k) Plans ............................................ 5 About this Publication: funds, and balanced funds. Plans having just these four Introduction pants in 401(k) plans. This effort, known as the EBRI/ICI Participant-Directed Retire- 20s 30.4 0.7 58.3 1.3 3.9 5.4 0 0.1 0–2 24.5 3.5 39.8 32.3 100.0 2–5 42.8 Nov. 0% 6 20–30 >10,000 0 10.4 91 34.5 2,112,700 10.3 6.8 35.1 109,687,279,283 1.8 0.29 51,918 1.0 100.0 10 ments, whereas older participants are more heavily EBRI 14.3% employer stock or balanced funds. As a result, overall determinants of tions in both types which withdrawals the level of the unpaid balance was 16 percent of the 155,000. Thus, 401(k) plans accounted for approximately base are small, The EBRI/ICI database is the most increases. The SCF is a stratified random sample of U.S. house- The increase is present for all age > $250,000,000 153 2,334,319 142,847,112,650 61,194 borrow from the account. which the appropri- sponsoring public opinion surveys on employee benefit issues. Access to the account balance range was assigned; EBRI’s Education and Research Fund outstanding loan balance; without employer- (EBRI-ERF) funds Table 7, Percentage of Participants With Zero Hinz, Richard, David McCarthy, and John Turner. “Are 30% $0.01– $10,000.01– $20,000.01– $30,000.01– $40,000.01– $50,000.01– $60,000.01– 1997 Plan Year Experience $70,000.01– $80,000.01– $90,000.01– >$100,000 . Chicago, IL: Profit Shar- All Equity Balanced Bond Money Company Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. 30s 27.5 have become a 1.0 59.4 $100,000 1.9 most comprehensive source of information on individual 4.3 5.8 0 0.1 The EBRI/ICI Database .................................................. > 30 0 14.9 27.0 6 6.9 5.4 40.9 3.7 5– 0.0 10 1.1 100.0 45.9 2–5 28.2 4.9 40.3 26.7 100.0 15% options have 61.6 percent invested in equity funds, ment Plan Data Collection Project, has obtained data for 401(k) plan participants from 15% All 27,762 6,601,738 246,398,246,538 37,323 may be made at book invested in fixed-income assets. For example, the All equity-related investments of those holding no equity 77 percent of the net increase in all private pension 27,762 6,601,738 246,398,246,538 whether measured account balances a 37,323 $10,000.00performs the charitable, educational, and scientific functions of the Institute. EBRI-ERF is a tax-exempt organization $20,000.00 $30,000.00 $40,000.00 $50,000.00 $60,000.00 $70,000.00 $80,000.00 $90,000.00 $100,000.00 comprehensive source of participant-level groups but is especially large for those in their of plans, whereas holds and is administered by the Federal Reserve Board. net account balance. 5% Funds Funds Funds Funds Bond GICs Stock before retirement or separation, however, is restricted by ate information is 40s 23.6 1.6 58.9 4.0 in participants’ investment portfolios; and asset values 4.6 7.1 0 0.2 directed, matching Equities Who Have Exposure to Company Stock Women Conservative Investors?: Gender Differences All 0 10.3 33.5 11.8 8.3 ing/401(k) Council of America, 1988. 32.5 1.7 10 1.0 –20 0.9 100.0 55.6 9.8% significant part plan participants. Source and Type of Data E5MPLOYEE –10 30.4 7.4 ............................................. 39.9 22.3 100.0 6 Dec. This report is being published simultaneously as certain of EBRI and ICI sponsors and members serving as plan recordkeepers and EBRI Issue Brief No. 205 and as ICI Perspective, Funds 6.8% 13.8 percent in balanced funds, 11.7 percent in bond 20% 7 24 supported by contributions and grants. 8.4% Account Balance 11 complicate the 50s 23.1 2.2 53.5 4.9 funds are 38.5 percent of plan balances. 5.2 10.9 0 0.3 value to provide plan average share held in stocks through equity funds, plans. 20–30 58.9 by the number of data on 401(k) plans to date. Indeed, only fifties and sixties. In addition, for each tenure Ameriks, King, and available, Although the survey has the advantage of providing less contributions, but the regulation, and loans from the account must typically $80,000 attributed to those funds. 10% An asset category for each or to Balanced/Mixed Funds ..................................... 12 in Participant-Directed Pension Investments.” In Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. ________. Company Stock in Defined Contribution Plans: 10–20 33.6 9.1 38.5 18.9 100.0 Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. Investment Options Panel A: All Ages Combined of the private pension system and an important compo- 10% The purpose of this paper is to report the initial Distribution of Plans, Participants, and Assets Vol. 5, No. 1. This document is available on the Internet at www.ebri.org and at www.ici.org/economy/ administrators. 60s 25.1 5.7% 2.3 41.4 6.4 5.2 19.0 0 0.6 funds, and 11.9 percent in money funds (panel A, 0% Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. > 30 55.2 BENEFIT interpretation of Warshawsky benefits. Other stable company stock, and balanced funds declines from Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. Similarly, 401(k) plans accounted principally for plan participants or three research projects have used admin- group, the average balance rises with age. information on asset holdings outside the participant’s Money be repaid within five years. than 1 percent 4.1% participant was determined by summing the asset shares of GICs, 40s The remainder of the paper is organized as $0.01– $10,000.01– $20,000.01– $30,000.01– $40,000.01– $50,000.01– Table 8, Asset Allocation Distribution for Participants $60,000.01– $70,000.01– $80,000.01– $90,000.01– >$100,000 Mitchell, Gordon et al., 20–30 37.7 9.8 Positioning Pensions for the a 35.7 16.9 100.0 A Successful Partnership for Employees and Employ- 1999 10% All 24.3 1.8 54.6 4.3 4.8 9.9 0 0.3 nent of the retirement security of many American 22 3.1% findings from the EBRI/ICI Participant-Directed Retire- Equity, Bond, Money,All 52.1 by Plan Size ............................................................ Guaranteed investment contracts. 7 line 1). Adding GICs to the base group lowers the perspective.html. The report includes 1996 information on 6.6 million active participants in 27,762 2.5% 5% Funds 5.4% $60,000 17 12 value funds are An examination of the distribution of $10,000 5% $20,000 $30,000 $40,000 $50,000 $60,000 the growth in the number of participants and assets in $70,000 $80,000 2.0% $90,000 1.6% $100,000 plan assets. For average balances. 1.3% istrative records; (1997) analyzed 401(k) plan, it only asks the respondents to indicate plan were in plans offering loans. However, only 18 percent of require employermuch of the research EBRI Issue Briefs Account Balances induce employees with the least amount of disposable are monthly periodicals providing expert evaluations of follows. The next section discusses the growth and 76.8 percent for participants in their twenties to > 30 45.0 9.3 30.5 15.2 100.0 participant’s assets in all funds. bond funds, and RESEARCH With No Equities & Balanced Funds 61.60% ....................................................... 13.80% 11.70% 11.90% 13 Twenty-First Century. Philadelphia, PA: University of ers. Chicago, IL: Profit Sharing/401(k) Council of workers. In these plans, participants are typically ment Plan Data Collection Project. The report includes (table 1, table 2) 13 ur publications plans holding nearly $246 billion in assets. The data include demographic information, allocation in all four funds, but the greatest decrease is 31 18 Panel C: Asset Allocation by Age Cohort for Total Balances in Plans Other or The relation- account balances underscores the effects of age 0% employee benefit issues and trends, as well as critical analyses of employee Equity, Bond, Money, Source: Tabulations from EBRI/ICI Participant-Directed Retirement synthetic GICs O or similar instruments. The “other Account Balance example, more than 50 percent of the plans have 25 or private-sector plans. By 1994, the portion of active income to contribute to the 401(k) plan. Investment options have been grouped into nine Other Stable The frequency has used aggregate 401(k) plan data. asset allocation for asset allocations as “mostly in stock,” “mostly in bonds,” those eligible for loans had loans outstanding at the end contributions to be 53.2 percent for participants in their sixties. In money funds are Source and 0% development of 401(k) plans and describes their principal Pennsylvania Press, 1997. America, April 1997. responsible for investing contributions made to their 0% 0–2 2–5 5–10 10–20 20–30 > 30 $40,000 1996 information on 6.6 million active participants in Unidentified 1% 30s Relationship of Database Plans to the Universe • The average account balance (net of plan loans) for all INSTITUTE With a Company Stock Investment Option But No Employer-Directed Contributions Value Funds .8% in bond and money funds (panel A, line 2). Thus, GICs Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan benefit policies and proposals. Each issue, ranging in length from 16–28 pages, thoroughly explores one topic. ® annual contributions, plan balances, asset allocation, and loans, and are currently the & Balanced Funds Plan Data Collection Project . EBRI 0–2 2–5 5–10 10–20 20–30 > 30 and tenure. For example, overall, approxi- fund” category was the residual for other investments About the Authors ship between account balances and two of the : a sample of 403(b) plan participants. Finally, Sunden broad asset classes. Equity funds consist of pooled fewer participants, and another 28 percent fall within of outstanding loans more than doubles for those in the participants in 401(k) plans had increased to 39 percent Among those using administrative or “split between.” Any analysis of this data therefore Years Years Years Years Years Years Chart 1 of 1996. invested in company contrast, fixed-income investments rise from 22.1 per- < $10k $10k–$20k $30k–$40k $40k–$50k $50k–$60k Char $60k–$70k ts $70k–$80k $80k–$90k $90k–$100k smaller as well (table > $100k ever, varied with age, tenure, and account balances. features. The following section provides a detailed $20k–$30k a KPMG Peat Marwick. Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. Retirement Benefits In The 1990s: Sunden, Annika E., and Brian J. Surette. “Gender Differ- & GICs 54.90 7.60 4.00 3.70 28.80% 401(k) accounts. As a consequence, future retirement Data Collection Project. Type of 27,762 plans holding nearly $246 billion in assets. Years Years Chart 14 Years Years Years Years of Plans .................................................................... Notes is a monthly periodical providing current information on a variety of employee benefit topics. 7 participants is $37,323, and the median balance is EBRI’s Washington appear to be a substitute for other types of fixed-income most comprehensive source of information on individual plan participants. In 1996, the 20s 48.5 3.9 20.6 5.3 12.1 8.0 0.2 1.4 The EBRI/ICI . mately 85 percent of all participants in their such as real estate funds. The final category consists of Tenure Benchmarking Results: EBRI/ICI vs. Cerulli (1998) the range of 26 to 100 participants (table 1). In contrast, of the total for all plans, while the 401(k) portion of total determinants can be examined using information in the investments primarily investing in stocks. These funds records, Goodfellow and Schieber (1997) and Surrette (1998) analyzed gender differences in asset must either restrict itself to these three categories or stock. This percent- cent for participants in their twenties to 45.9 percent Loan activity varies by age, tenure, and account$20,000 $10,000 to $20,000 account balance category and then Source: Tabulations from EBRI/ICI Participant-Directed description of the EBRI/ICI 401(k) database and com- Loan Ra Equity, Bond, Money, tios for Participants With Loans, 5, panels A and C). by Age Tenure 1998 Survey Data. Loan ratios tend to decrease with age, dropping Washington, DC: KPMG Peat ences in the Allocation of Assets in Retirement incomes of a large and growing number of workers now Bulletin provides sponsors with short, timely updates on major federal developments in employee benefits. Updates for subsequent years will be provided as data EBRI’s 30s 46.7 3.2 19.9 4.9 13.0 11.3 0.1 1.0 (chart 1) Chart 1, Benchmarking Results: EBRI/ICI /vs. Cerulli $11,600. Reported account balances do not reflect first year for which data are ready for analysis, the EBRI/ICI database appears to be 14 20s investments. In contrast, adding company stock to the Data Retirement Plan Data Collection Project. EBRI/ICI database. One of these is participant age and & Balanced Funds twenties have account balances of less than allocations in retirement plans using the 1995 Survey of funds that could not be identified. Jack VanDerhei, Temple University, is research director of the EBRI Fellows Program; Russell G. include mutual funds, bank collective trusts, life insur- only 4 percent of the plans have more than 1,000 partici- declines gradually as balances increase. plan assets had grown to 29 percent. Contributions into investigated the investment elections of balance. Of those individuals in plans with loan provi- utilize ad-hoc assumptions with respect to the actual age is consistent with for participants in their sixties. More specifically, As a result, the Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan from 30.0 percent for participants in their twenties to pares the 1996 data with the universe of plans. It also Fundamentals of Employee Benefit Programs 40s 41.8 3.5 21.2 offers a straightforward, basic explanation of employee benefit programs 6.3 11.7 14.2 0.3 0.9 Marwick, 1998. Savings Plans.” The American Economic Review. Vol. 100% depend upon their investment decisions. Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. become available. Comparison With Other Participant-Level (1998) additional retirement savings held in predecessor ........................................................................... 8 & Company Stock 38.80 5.10 8.10 7.90 35.30% base group produces the greatest reduction in the equity broadly representative of the universe of 401(k) plans. Key findings include: $0 Data Collection Project. 20 Data Collection Project. between 20 percent and 80 percent. Database $10,000 (chart 7). However, only 62 percent of Galer is senior counsel of ICI; Carol Quick is a research associate at EBRI; and John D. Rea is vice The data were received in varying formats from 50s 39.2 3.8 20.2 7.7 pants showed the following asset allocation: 21 percent the other is tenure of the participant with employer, 11.5 16.6 0.3 0.8 Consumer Finances. ance separate accounts, and other pooled investments. pants. Similarly, nearly one-half the plans have assets 401(k) plans rose sharply, accounting for nearly 53 per- 36,000 participants in 24 401(k) plans. distributions. in the private and public sectors. The EBRI Databook on Employee Benefits is a statistical reference volume on employee sions, the highest percentages with outstanding loans evidence found in younger participants hold more of their account Plan adminis- overall exposure to 9.8 percent for those in their sixties (chart 14). Similarly, contrasts the EBRI/ICI database with other data sources Milne, Deborah A., Jack L. VanDerhei, and Paul J. 88. No. 2 Equity, Bond, Money, 0–2 (May 1998): 207–211. This aspect of 401(k) plans, along with their 2–5 5–10 10–20 20–30 > 30 Databases ................................................................ 8 Chart 2, Asset Allocation for Total Plan Balances plans or rolled over into individual retirement ac- Bodie, Zvi, Alan J. Marcus, and Robert C. Merton. “De- ........ 9 Allen, Everett 30% fund share (panel A, line 3). Finally, adding both GICs 60s 33.3 4.5 16.1 8.5 11.9 24.8 0.4 0.4 The percentage of those holding no equity funds benefit programs and work force related issues. which serves as a proxy for length of participation in the those in their twenties with five to 10 years of each of the data providers. Raw data from each provider president of research and chief economist at ICI. less than $250,000, and another 28 percent have plan cent of all new contributions in 1994. Years 90% Similarly, bond funds are any pooled account primarily money funds, and 0.8 percent in other stable value funds Years Years Years Years Years The total number of participants in the were among participants in their thirties, forties, or surveys of plan balances in equity funds than older participants, who In contrast to participant survey data, the EBRI/ in insurance company general accounts, 19 percent in & Balanced Funds, equity through used to examine participant activity in 401(k) plans. • For all participants, 44.0 percent of the total plan balance is invested in equity funds, trators that are Average Loan Balance Plans—EBRI/ICI loan ratios decrease with tenure; participants with less Yakoboski. “Participant Education: Actions and Out- Ternoey, Brian C. “Asset Allocation: Issues at Retire- rapid growth, has raised interest in the investment All 40.6 3.7 19.9 6.8 11.9 16.1 0.3 0.8 The analysis of Asset Allocation ............................................................... 9 Chart 3, Distribution of Account Balances counts (IRAs). fined Benefit versus Defined Contribution Pension .................. 14 T. Jr., Joseph J. a and company stock produces a combination of the two GICs , & Company varies positively with age and tenure. Of those partici- plan. Age and account balance should generally be tenure have account balances less than $10,000; Tenure were formatted in a standardized structure. Participant The average invested in bonds, and balanced funds are pooled ac- assets between $250,000 and $1,250,000 (table 2). 25% plans analyzed in their study ranged from ICI database does not contain information about partici- fifties (chart 11). In addition, participants with short sponsors. Most of the tend to invest more heavily in GICs and bond funds. corporate stock other than that of the sponsor, 19 per- Participants—EBRI/ICI company stock and either EBRI sponsors or ICI members provided records 19.1 percent in employer stock, 15.1 percent in guaranteed investment contracts (chart 2). A total of 0.4 percent was in other investments than two years of tenure had an average of 27.3 percent The next three sections provide the initial balances of this size, and the percentage increases to comes” EBRI Issue Brief No. 169 (Employee Benefit ment.” Benefits Quarterly. Vol. 12. No. 2 (Second decisions made by plan participants. Information on the 1996 data Average Asset Allocation by Age and Investment 80% Chart 4, Age Composition of Selected Account Stock Plans: What Are the Real Trade-offs?” In Zvi Bodie, 31.60 6.90 5.40 1.70 23.50 30.30 Melone, Jerry S. effects, with company stock likely displacing equity • Nearly one-half of the participants have account 28 19 21 pants in their twenties, for example, 28.3 percent held no the remaining balances exceed this figure data from all data providers were then combined into one Special thanks for their assistance with this report go to Kathryn Ricard, ICI assistant counsel, and Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. In one important respect, however, the average balance of the sixties age For those with outstanding loans at the end of 1996, the positively related, as younger workers are likely to have Participants and assets, however, are concen- account balance counts invested in both stocks and bonds. Company stock Assets—EBRI/ICI around 150 to 6,000. pant assets and income outside of the 401(k) plan. Nor In addition, 28Contact EBRI Publications, (202) 659-0670; fax publication orders to cent in registered investment companies, 16 percent in on active participants in 401(k) plans administered by findings from the database. They begin with a section tenure (0-five years) and long tenure (more than plans with this The trend is less true for employer stock. (GICs), 7.8 percent in balanced funds, 6.8 percent in bond funds, 5.4 percent in money Featur and 0.6 percent was in unidentified investments. es of 401(k) Plans pooled investments is On of their account balances loaned out while those with Research Institute, January 1996). Quarter 1996): 21–27. 20% 43 percent for those with more than 30 years of tenure. these decisions, as well as other aspects of participant a focuses on asset Plan a Options .................................................................... 9 Balance Categories John B. Shoven, and David A. Wise, .................................................... Pensions in the 14 ubscriptions/orders Guaranteed investment contracts. Rosenbloom,Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. group with over 30 years of tenure may understate the potential balance Age Panel B: Plans With NO Company Stock or GICs funds and GICs displacing other fixed-income invest- balances with their current employer of less than S equity funds, compared with 46.2 percent of those in Bibliography average level of the unpaid balance as a percentage of either lower incomes or shorter periods of plan participa- Plans—Benchmark (chart 8). data set for analysis. Plan-specific data were also Mitch Post, director of market risk oversight at Freddie Mac. (202) 775-6312. Subscriptions to trated in large plans. For example, 72 percent of the EBRI Issue Briefs are included as part of is equity in the plan’s sponsor (the employer). Money • Yakoboski and VanDerhei (1996) ana- Investment options offered by 401(k) plans appear to does it contain information about defined benefit plans 30 years) tended to utilize loan provisions less than other feature in the EBRI/ for all partici- employer securities, 11 percent in government and considerably higher these organizations in 1996. These administrators that examines asset allocation among 401(k) plan funds, 0.8 percent in other stable value funds, and 1.0 percent in other or unidentified 70% the whole, approximately two-thirds of the plan balances ________. “Can We Save Enough to Retire? Participant more than 30 years only had 7.4 percent (chart 15). U.S. Department of Labor. Pension and Welfare Benefit because participants in this group could actually have been in a true 401(k) activity in 401(k) plans, is limited and, to date, has not Summary allocation, plan 23 (chart 2, table 3, table 4) Chart 5, Tenure Composition of Selected Account U.S. Economy. Chicago, IL: University of Chicago and Jack L. 15% $10,000, while nearly 10 percent have balances in ments (panel A, line 4). EBRI membership, or as part of a $199 annual subscription to 20s EBRI Notes Particip 68.70 ants—Benchmark and 12.00 EBRI Issue Briefs. 8.70 9.50 Individual copies are their sixties. Similarly, 24.5 percent of those with less account balances was 16 percent. This loan ratio, how- tion than older workers. In line with this observation, The effect of tenure and age is even combined into a second standardized-format data set. pants in the funds consist of those income funds designed to maintain plan for no more than a fraction of that time given legislative and regulatory participants in the database are in plans with more than In a typical 401(k) plan, an employee contributes a lyzed the asset allocation decisions of with the current employer or previous employers or participants (chart 12). Finally, only 11.7 percent of ICI database, influence asset allocation. Plans offering only the corporate debt securities, 8 percent in cash, and 6 per- for participants in included mutual fund companies, insurance companies, investments. This allocation implies that over two-thirds of plan balances are were invested in equity securities, which represent the Loan ratios tend to decrease as account balances in- participants. Asset allocations are presented by age and Education in Defined Contribution Plans.” EBRI Issue Administration. Abstract of 1994 Form 5500 Annual been sufficient to study participant asset allocation. The 30s 67.60 12.90 9.30 9.10 balances, and Asset Allocation of Employee and Employer Balance Categories Press, 1988. .................................................... Chart 5 14 Balances available with prepayment for $25 each (for printed copies) or for $7.50 (as an e-mailed electronic file) by calling VanDerhei. Pen- Assets—Benchmark Chart 4 chronologies. However, some of these balances are undoubtedly conversions excess of $100,000. Those individuals with balances © 1999. 60% 26 than two years of tenure hold no equities, compared with more pronounced for older workers. For ex- Checking each individual record would have been 1,000 participants, and these same plans account for portion of his or her salary to a plan account and deter- nearly 60 percent of those participants with account This Issue Brief was written with assistance EBRI/ICI from the Institute’s research and editorial staffs. Any a stable share price. Guaranteed investment contracts 10% 401(k) plan participants working for information about spouses’ income, assets, and retire- cent in miscellaneous investments. and investment management companies. Records were investment option, and the effect of employer-directed participants with account balances under $10,000 had however, are large and thus a significantly higher options of equity, bond, balanced, and money funds invested directly or indirectly in equity securities. sum of the asset shares of equity funds, company stock, plans with employer-directed contributions. For example, crease. Chart 16 shows that outstanding plan loans 40s 63.90 14.00 10.70 10.40 Brief No. 160 (Employee Benefit Research Institute, Reports. Washington, DC: U.S. Government Printing lack of data reflects the relatively recent origin of 401(k) EBRI or from www.ebri.org. Change of Address: EBRI, 2121 K Street, NW, Suite 600, Washington, DC 20037, (202) from pre-existing profit-sharing plans. Tenure Composition of Selected loan activity. Age Composition of Selected Contributions ........................................................ Availability 10 Chart 6, Average Account Balance, by Age and by less than $10,000 are primarily young workers or Buck Consultants. 401(k) Plans: Survey Report on Plan sion Planning: Pensions, Profit Sharing, and Other Employee Asset Allocation of Employee and 45.0 percent of those with more than 30 years of tenure. balances less than $10,000 are in their twenties and ample, 30 percent of those participants in their impossible; however, a variety of aggregated statistics for views expressed in this report are those of the authors and should not be ascribed to the officers, 82 percent of all plan assets (table 1). mines how the assets in the account are invested. The (GICs) are insurance company products for which the 50s 59.70 14.30 12.50 12.40 three large employers (AT&T, IBM ment plans. Nonetheless, the broad scope of the EBRI/ outstanding loans (chart 13). This figure is well below 15 percent of employees and 25 percent of assets are in tend to have the highest allocations in equity funds. database is A more appropriate way to examine this issue is to project account balances equity funds and company stock represent 68.7 percent Two studies have examined administrative encrypted to conceal the identity of employers and contributions on investment patterns also is examined. and the equity portion of balanced funds. 775-9132; fax number, (202) 775-6312; e-mail: Publications Subscriptions@ebri.org. Account Balance Categories Membership Information: Inquir- constitute approximately 38 percent of the account April 1995). Account Balance Categories 50% 31 Office, 1998. plans and the difficulty of collecting comprehensive The principal findings are as follows: 5% (table 5) workers with short tenure with their current em- Tenure An alternative method of obtaining emergency funds is through a hardship Design-1997 ........................................................................ . Ninth Edition. New York, NY: Buck 15 Benefit Deferred Compensation Plans • Asset allocation varies with age. For instance, on average, individuals in their . Eighth edition. 60s 49.70 14.60 17.60 17.30 27 of Plan over participants’ working lifetimes under a variety of assumptions. Poterba, The absence of equity fund holdings does not thirties, while less than one-fifth are in their fifties or sixties have account balances less than $10,000 Employer Contributions $37,323. each administrator’s plans was reviewed by the adminis- trustees, members, or to the sponsors of EBRI, EBRI-ERF, or their staffs. Neither EBRI nor EBRI-ERF There is, however, wide variation around the contribution window is followed by a “holding period,” employer typically selects the investment options Corporation, and New York Life Insur- ICI database means that it offers the single best source the 18.2 percent rate for all participants. This finding is plans with employer-directed contributions. The addition of company stock to these options ies regarding EBRI membership, and/or contributions to EBRI-ERF should be directed to EBRI President Dallas records for individual participants in 401(k) plans. of the self-directed assets of participants in plans with employees but were coded so that both could be followed Participant asset allocation varies considerably balance for those with less than $10,000 in account In addition, the distribution of equity fund allocations distribution. Because we are not yet able to control for these distributions, the Musumeci, Jim. “Investing for a Distant Goal: Optimal U.S. General Accounting Office. 401(k) Pension Plans: information on 401(k) plan participants. Venti and Wise (1997) have investigated the magnitude of 401(k) account Research Distribution of Equity Fund Allocations and Chart 7, Impact of Age on Account ployer. In contrast, those with balances in excess of Consultants, 1997. ............................... 15 Homewood, IL: Richard D. Irwin, Inc., 1997. twenties invested 76.8 percent of assets in equities and only 22.1 percent in fixed- a 0% 5 Panel C: Plans With GICs necessarily mean that a plan participant has no exposure (chart 7). However among those with short trators to detect inaccuracies. This resulted in some takes positions on specific policy proposals. EBRI invites comment on this research. Salisbury at the above address, (202) 659-0670; e-mail: salisbury@ebri.org 40% results may be biased for participants with lower account balances. available to the employee. sixties (chart 4). Similarly, of those with account bal- These options may include average. For example, 47.2 percent of participants have during which interest is credited at a rate guaranteed ance Company) with a total of 180,000 of data for analyzing participant activity within 401(k) Loans Yakoboski and VanDerhei (1996) studied asset allocation in subsequent years. across participants is analyzed, with special attention notable, because loan availability is often thought to substantially reduces the allocation to equity funds. The asset allocation of participant-directed balances at retirement age. To judge the relative importance of potential 401(k) with age (table 3). Younger participants tend to invest a Relationship of Database Plans to the employer-directed contributions in company stock. For balances who have an outstanding loan. This ratio Loans Asset Allocation and Attitudes Toward Risk.” TIAA- Loan Provisions Enhance Participation but May Affect To fill this void and to enhance understanding of 20s 30s 40s 50s 60s All Institute- Participant Exposure to Equities ........................ 11 Chart 8, Impact of Age and Tenure on Account $100,000 are older workers with long tenure. Approxi- Cerulli Associates, Inc. The Cerulli Report: The State of Ameriks, John, Francis P. King, and Mark Warshawsky. income investments. By comparison, individuals in their sixties invested 53.2 percent Asset Allocation Age Chart 7 A participant’s 401(k) plan balance reflects both the to the stock market. Indeed, more than one-half of the contributions, they compare projected 401(k) assets of future generations with ances greater than $100,000, more than one-half are in tenure (zero to two years) 77 percent of these modifications of plans included in the analysis as well as 20s pooled equity, bond, and money funds, guaranteed 65.20 7.10 4.30 3.20 18.40 employees. Finally, Hewitt Associates has an account balance of less than $10,000, while 9.8 per- plans. Combined with the information from participant balances in plans with employer contributions required The addition of GICs to the four options lowers among participants in plans of three large corporations, total balances in these plans, the share is 78.9 percent given to those participants holding no equity funds. greater percentage of account balances in equity funds; decreases to approximately 7 percent for those with CREF Research Dialogues. No. 56 ( July 1998). Income Security for Some. (Letter Report, 10/01/97, Education the contribution of 401(k) plans to retirement security, Universe of Plans (table 6, table 7, table 8) 30% the 1992 assets of the Health and Retirement Survey (HRS) sample. The mean mately one out of every four participants in their Balance, Participants With Account Balances the Pension and Retirement Markets. Impact of Age on Account Balance Financial Press “Premium Allocations and Accumulations in TIAA- of their assets in equities and 45.9 percent of assets in fixed-income investments. 30s 62.50 7.60 4.30 3.30 20.70 100% Of the 27,762 Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan participant’s and the employer’s contributions to the individuals with no equity funds holdings had invest- their fifties or sixties, while one-tenth are in their older participants have account balances under cent have an account balance in excess of $100,000 reclassification of asset categories. investment contracts (GICs), and often the employer’s (table 5, panels A and B). By comparison, the combined 6developed an index to track the invest- surveys, the EBRI/ICI database represents a significant to be invested in company stock differs markedly from allocations to all other investment options, with the Editorial Board: Dallas L. Salisbury, publisher; Steve Blakely, managing editor; Cindy O’Connor, production and distribution. Any and Goodfellow and Schieber (1997) analyzed asset 1 older participants are more disposed to invest in GICs. 100% account balances in excess of $100,000. Evidence indicates that the availability of loans increases participation The following section examines plan balances investment income may be withdrawn if they were made or earned before the of 401(k) assets for the entire sample was only $10,808, but this was • For all participants in the database, 44.0 percent of Olsen, Kelly A., and Jack L. VanDerhei. “Defined Contri- and Research GAO/HEHS-98-5), 1997a. 40s 58.00 8.00 4.10 3.60 25.10 the Employee Benefit Research Institute (EBRI) and Data Collection Project. Other Research on Asset Allocation......................... 12 Less than $10,000 sixties had an account balance with his or her current Copy, 1998. ..................................................... 16 CREF—Trends in Participant Choices Among Asset views expressed in this publication and those of the authors should not be ascribed to the officers, trustees, members, or othe 401(k) plans in r account. Although most plans give the participant rates. Plans that make loans available, as reflected in the findings from a ments in either employer stock or balanced funds $10,000 while less than 20 percent of those with end of the last plan year ending before July 1, 1989. significantly affected by the majority of the respondents’ having had no 401(k) equity. The employer also often either matches a portion thirties and virtually none are in their twenties. share of equity funds and company stock is 60.5 percent (chart 3). 3 ment activity of 401(k) participants. This step forward in understanding the role and contribution • Investment options offered by 401(k) plans appear to influence asset allocation. For 20% allocation of participants in 24 plans administered by and considers the extent to which the balance depends that of participants in other plans. In particular, com- greatest effect on bond and money funds. 90% 2 50s On average, participants in their twenties have 55.1 per- 54.30 7.80 3.70 3.60 29.60 Fund. The distribution of participants, plans, and assets in the the total plan balance is invested in equity funds, bution Plan Dominance Grows Across Sectors and ________. 401(k) Pension Plans: Extent of Plans’ Invest- the Investment Company Institute (ICI) have collabo- 90% 90% sponsors of the Employee Benefit Research Institute, the EBRI Education and Research Fund, or their staffs. Nothing herein is Chart 9, Impact of Age and Tenure on Account employer in excess of $100,000. Similarly, approxi- Clark, Robert, Gordon Goodfellow, Sylvester Schieber, Chart 12 to recent U.S. General Accounting Office (1997a) report, have a higher Plan Balances Classes and Investment Accounts.” 25 ................................................................ TIAA-CREF Re- 13 accounts. Using historical experience to project future contributions, the Chart 11 the EBRI/ICI database, 52 percent offered a plan loan to complete control over the allocation of assets from both (table 7). For all participants with no equity funds, 60s Tenure and plan balances also have a positive 43.10 6.50 3.70 4.30 41.70 long tenure (more than 20 years) are in this 8 of the employee’s contribution or makes an annual in plans without employer-directed contributions (table • index is based upon 1.4 million 401(k) Employer contributions in the form of company stock of 401(k) plans to retirement security. pany stock represents 32.7 percent of the assets of A participant’s account balance—and thus the example, the addition of company stock substantially reduces the allocation to equity Watson Wyatt. Although encompassing a considerably Those who are less than 18 years old have not been included in the analysis. All rights upon age and tenure. The final section documents Distribution of Plans, Participants, and cent of their account balances in equity funds in contrast EBRI/ICI database for 1996 is similar to that reported proportion of employees participating in the plan, and participants in such Employer Sizes, While Mega Defined Benefit Plans be construed as an attempt to aid or hinder the adoption of any pending legislation, regulation, or interpretative rule, or as authors find that, on average, a 37-year-old in 1996 would have a 401(k) ments in Employer Securities and Real Property. 19.1 percent in employer stock, 15.1 percent in legal, rated over the past two years in the collection of data on Percentage of Eligible Participants With Loans, (chart 3, chart 4, chart 5, chart 6, chart 7, chart 8, Percentage of Eligible Participants With Loans, 80% 29 mately 31 percent of workers with 20 or more years of Balance, Participants With Account Balances and Drew Warwick. “Making the Most of 401(k) Plans: search Dialogues. No. 51 (July 1997). 10% 80% participants. The loan feature is primarily associated Approximately 1 percent of the participants had a birth date that was missing. 80% >30 sources, some do require that the employer’s contribution 33.5 per-cent of assets was in company stock and association, as long-term employees likely have had a range (chart 8). One explanation for the low < $10,000 plans contribute an average of 35 percent more to their accounts than variability across participants—depends upon a number accounting, actuarial, or other such professional advice. balance upon retirement at age 65 of $91,600 and a 27-year-old in 1996, contribution (as a percentage of salary) to each active 5, panel C). The higher allocation to equity also holds Panel D: Plans With Company Stock participants with approximately $62 reserved. participant-directed accounts in plans with such em- affect participant allocation behavior. Participants in funds and the addition of GICs lowers allocations to bond and money funds. smaller number of participants and plans, the findings to 33.9 percent for those in their sixties. Participants in by Tenure availability of plan loans. Characteristics of participants for the universe of plans by Cerulli Associates (1998). For guaranteed investment contracts (GICs), 7.8 percent Remain Strong: Where We Are and Where We Are Go- by Age 60s (Letter Report, 11/28/97, GAO/HEHS-98-28), 1997b. participants in 401(k) plans. In this collaborative effort, Assets by Plan Size Chart 15 chart 9) tenure with their current employer had account Over $100,000 ........................................................... 16 Bajtelsmit, Vickie L., and Jack L. VanDerhei. “Risk Who’s Choosing What and Why?” Pension Research participants in plans with no loan availability. retiring at age 65, would have $125,500 (measured in 1992 dollars). The 20–30 with large plans. In the database, more than 90 percent 9 be invested in employer stock. In such plans, the em- >$100,000 8.3 percent was in balanced funds (table 8). account balances among this 20 percent may be plans in which employer contributions are made in 70% 70% Approximately 17 percent of the total sample had a tenure range that was participant’s account. In many instances, the employer longer period in which to accumulate assets. In fact, across all age groups. of factors. Some of these are specific to the individual billion in collective assets. Currently, this from these studies are consistent with those reported 20s 70% 43.10 5.70 7.60 6.60 36.00 with outstanding loans also are analyzed. ployer-directed contributions, compared with 19.9 per- their twenties invest 7.8 percent of their account balance each of five plan size classifications, the share of the in balanced funds, 6.8 percent in bond funds, 5.4 per- ing.” EBRI Issue Brief No. 190 (Employee Benefit Loan Ratios for Particip 0% ants W VanDerhei, Jack L. Comment on “Individual Financial ith Loans, by Tenure Loans, however, may lower account balances. The effect of borrowing on a calculations assume that one-half of the 401(k) money was invested in stocks known as the EBRI/ICI Participant-Directed Retirement EBRI Issue Brief is registered in the U.S. Patent and Trademark Office. ISSN: 0887-137X 0887-137X/90 $ .50+.50 Loans .............................................................................. • Employer contributions in the form of company stock affect participant allocation 50s 16 Chart 10, Impact of Plan Size on Availability of balances in excess of $100,000. Aversion and Pension Investment Choices.” In missing. In addition, one data provider supplied “years of participation” Council Working Paper 98-12 . Philadelphia, PA, 10–20 30% of the plans with more than 10,000 participants offered Average ployee has discretion only over assets from his or her 30s nearly 60 percent of those with balances less than 42.90 5.50 6.40 6.60 35.50 that their employer’s 401(k) plan has only company stock appear to decrease allocations to contribution is required to be invested in the employer’s <100 100–500 501–1,000 1,000–5,000 5,000+ participant’s retirement income (assuming the loan is paid back) is a function index reflects the experience of large and others reflect features of the plan. At the participant The 1996 database contains 27,762 401(k) plans with cent in plans offering company stock as an investment above from the 1996 EBRI/ICI database. and one-half in bonds, and that average returns experienced since 1926 would 60%in GICs, and those in their sixties invest 26.1 percent. 60% database’s assets falling within those categories is very Research Institute, October 1997). rather than tenure, and this was used as a proxy for tenure. Decisions in Retirement Saving Plans and the Provi- cent in money funds, 0.8 percent in other stable value Plan Data Collection Project, EBRI and ICI have ob- 60% 5–10 Availability of Plan Loans ........................................ behavior. Participants in plans in which employer contributions are made in company 16 40s Plan Loans 1998. ................................................................. 39.50 5.20 7.00 7.40 37.50 17 Michael Gordon, Olivia S. Mitchell, and Marc 40s 25% borrowing privileges to employees (chart 10). In contrast, of the rate of return that would have been realized if the plan assets had not be realized. own contribution. $10,000 have five or less years of tenure, and almost recently been established. level are income, contribution rate, age, length of plan equity funds and to increase the allocation of company stock. Both the employee’s and employer’s contributions Other Resear corporations and does not provide any $246 billion of assets and 6,601,738 participants option but not having employer-directed investments in ch on Asset Allocation 30% Asset 25% Several researchers have examined asset Company stock represents an average of 16.7 percent of Distribution of Equity Fund Allocations Expansion close to the share found in the universe for that size Papke, Leslie E. “How Are Participants Investing Their 10 50s sion of Resources for Retirement.” In Martin funds, and 1.0 percent in other or unidentified invest- Number of 401(k) P 37.60 articip 5.00ants 8.30 8.30 2–5 35.50 been loaned out. If one assumes that (1) funds would have earned rates in tained data for 401(k) plan participants from certain of 50% Two of the data providers did not supply loan information. Data from these (chart 10) stock appear to decrease allocations to equity funds and to increase the allocation of Chart 11, Percentage of Eligible Participants With Clark, Robert L., and Sylvester J. Schieber. “Factors Af- Twinney, eds., 50% Positioning Pensions for the Twenty- 30s Plan Loans only 43 percent of the plans with 10 or fewer employees 29 50% The existence of plans with employer-directed stock in self-directed balances. In these plans, the Could we send a friend or colleague a complimentary Asset Chart 9 shows the effect of age and This is considerably smaller than the numbers reported in employee benefit are made on a pre-tax basis, although some plans also 90 percent of those with balances of more than $100,000 Did you read this as a pass-along? Stay ahead of employee benefit participation, asset allocation, rollovers from other plans, 20% analysis of employee demographics. (table 1). Measured against the universe of 401(k) plans, allocation from surveys of participants in 401(k) plans 60s 34.60 4.80 11.60 9.70 29.50 excess of the borrowing rates had they not been loaned out, and (2) contribu- company stock (table 5, panels A and C). The tendency providers were excluded from the analysis of participant behavior with respect the total account balance of participants in their twen- 25% category (chart 1). Similarly, the share of the database’s ments. This allocation implies that more than 0–2 Accounts in Participant-Directed Individual Account Feldstein, ed., Privatizing Social Security. Chicago, Allocation and Par 20% ticipant Exposure to Equities their sponsors and members serving as plan record 401(k) Plan of 401(k) Characteristics of Participants With Outstanding 30 company stock in self-directed balances. Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. Loans, by Age fecting Participation Rates and Contribution Levels in ............................................................ 17 First Century. Philadelphia, PA: University of consulting firms’ reports. Both Hewitt (1997) and William M. Mercer (1997) 40% issues with your own subscription to EBRI Issue Briefs for only $49/ had the loan feature. Indeed, less than 60 percent of contributions suggests examining separately the alloca- tion rates are not affected by the existence of the loan, then the 401(k) account Form 5500, filed annually with the Internal Revenue copy of EBRI Issue Brief? 20s to loans. have at least 10 years of tenure (chart 5). tenure on account balances for those partici- average concentration in company stock from both a 40% withdrawals, and borrowings. Plan features include age the 1996 database accounts for 9 percent of all plans, for these participants to elect to invest a higher share of and 403(b) plans. Poterba and Wise (1998) used the 1992 40% ties, rises to 21.1 percent for participants in their forties, Panel E: Plans With Company Stock and GICs Surveys of 401(k) participants participants and plans within these size categories is Pension Plans?” The American Economic Review. Vol. • report in excess of 80 percent of their sampled plans offer loans. However, both Fifty-two percent of the plans, accounting for 70 per- IL:two-thirds of plan balances are invested directly or The University of Chicago Press (1998), pp. 393– keepers and administrators. The data include demo- 20% 15% balance would be smaller as a result of the borrowing activity, even after the Loans ..................................................................... 16 Chart 12, Percentage of Eligible Participants With year electronically e-mailed to you or $99/year printed and mailed. 401(k) Plans.” In Olivia S. Mitchell and Sylvester J. Pennsylvania Press, 1996. by Age and 15% the plans with 51 to 100 participants offered loans to Plans tion of participant-directed balances in these plans. Of Service by private pension plans, is a source of aggregate 11 The effect of participant age and tenure is pants with balances more than $100,000. 30% employer-directed and participant-directed invest- • The average account balance (net of plan loans) for all participants is $37,323. The of these surveys appear to be heavily influenced by large plan sponsors. The Plans with assets invested exclusively in company stock were excluded from 5 4 16 18 percent of all participants, and 31 percent of all the assets that they control in company stock holds not Allocation and falls to 15.0 percent for those in their sixties. loan is paid back. 20s approximately the same as that in the universe. Among individual participants, the share of assets The law permits a defined contribution plan to be established on a basis 40.30 7.60 2.70 1.80 11.40 35.20 88. No. 2 (May 1998): 212–216. cent of the participants, offered loans to plan partici- 400. indirectly in equity securities. 30% For more information about subscriptions, visit our Web site at 30% graphic information, annual contributions, plan (chart 11, chart 12, chart 13) Loans, by Tenure Schieber, eds., ....................................................... Living with Defined Contribution Pen- 17 Bassett, William F., Michael J. Fleming, and Anthony P. 15% Development the database under the assumption that they provided no participant direction results in the EBRI/ICI database for plans with more than 1,000 participants employees. particular interest is the extent to which participants in information on asset allocation in 401(k)-type plans. The Send an issue to Although approximately 25 percent of partici- ments combined exceeds 50 percent of total plan 10% Investment that allows employees to direct the investment of their own accounts. Under revealed more clearly by examining the effect of the 10% balances, however, represent only amounts with current employers and do not 30s 38.80 7.40 3.20 1.70 13.90 34.20 only for all participants but also for participants in 20% The mix of investment options offered by a plan 7 allocated to equity funds varies widely around the www.ebri.org or complete the form below and return it to EBRI. Poterba, James M., and David A. Wise. “Individual Fi- William M. Mercer. pants. Among participants eligible for loans, only Survey on Employee Savings Plans, The value of elective contributions in a 401(k) plan may be distributed only in the investment of either employee or employer contributions. We assume 25 appear very similar to Hewitt and Mercer. During the past Average Loan Balance .............................................. 17 Chart 13, Percentage of Eligible Participants With sions: Remaking Responsibility for Retirement. Rodrigues. “How Workers Use 401(k) Plans: The Par- Age does not appear to be a significant variable, but the percentage these plans, sponsors and other plan fiduciaries may be protected from 20% 40s 20% 34.00 7.00 4.10 1.70 18.50 33.90 these plans adjust their holdings of self-directed invest- interaction of the two variables on account balances. For accounts listed on the form, however, do not match those pants in their sixties have account balances in balances for all age groups younger than 60. 10% include amounts remaining in the plans of prior employers. Nor do the balances upon death, disability, separation from service, the termination of the plan different age groups. that all other plans provide participant direction, at least with respect to the 27 95 percent of total industry assets, and have more than 62 million individual significantly affects asset allocation. Table 4 shows four 1 5% Options average of 44.0 percent for all participants. A total of 5% Organization nancial Decisions in Retirement Saving Plans.” In Reported balances are net of plan loans. There is an extremely wide range investing in employer stock or balanced funds appears to be positively related potential liability for any losses that result from participant investment 1997. 18 percent had loans outstanding at year-end 1996. New York, NY: William M. Mercer, 1997. The Employee Benefit Research Institute is a nonprofit, nonpartisan, public 30 two decades, 10% 50s 31.30 6.90 6.00 1.70 23.60 29.90 (chart 14, chart 15, chart 16) We were able to obtain plan-specific information on loan availability for the Loans, by Account Balance Philadelphia, PA: University of Pennsylvania Press, ....................................... 18 ticipation, Contribution, and Withdrawal Decisions.” ments in response to mandatory investments in (provided no successor plan other than an employee stock ownership plan employee contributions. This appears to be a safe assumption in general in the EBRI/ICI database and thus do not provide for a 18 shareholders. a given age group, the average balance should increase 17 Characteristics of Par excess of $100,000 (chart 7), less than ticipants With • The allocation of plan balances to equity funds varies of estimates of average account balances in 401(k) plans. The Department of 5% indicate what savings would be in a “mature” 401(k) plan program. A partial list of this research includes Buck Consultants (1997), Hewitt Associates (1997), Profit to tenure. Name decisions, provided that participants are given the opportunity to exercise Two other micro-level defined contribution databases policy research organization which does not lobby or take positions on 10% Offsetting the higher allocation to company stock 10% vast majority of the plans in the sample (including virtually all the small 60s 30.6 percent of the participants held no equity funds at 22.50 6.30 8.40 1.60 38.50 22.10 Martin Feldstein, ed., Privatizing Social Security. Chi- Yakoboski, Paul J., and Jack L. VanDerhei. “Worker In- • The borrowing of plan balances varies by age, tenure, (ESOP) or a simplified employee pension (SEP) plan is established), or certain 401(k) plans have been the primary source of the growth because, according to survey data (KPMG Peat Marwick, 1998), 94 percent of 0% Bibliography 13 ................................................................... 19 Chart 14, Loan Ratios for Participants With Loans, 15 1998. National Tax Journal. 0% Vol. 51. No. 2 (June 1998): Address Labor (DOL, p. 85) provides an average account balance per active participant A synthetic GIC consists of a portfolio of fixed-income securities, “wrapped” Sharing/401(k) Council of America (1997), KPMG Peat Marwick (1998), William M. Mercer (1997), 0%control over the assets in their individual accounts and can choose from a Plans and participants represent 1997 estimates from Cerulli (1998), while have been analyzed but constitute different types of plans. legislative proposals. employer stock. 3 direct comparison. In addition, 1993 is the most recent 10 percent of those with 10 years of tenure or from participant to participant. For example, 26 plans). A plan without this information was classified as having a loan if any as tenure increases: A 30-year-old participant, for The plan balance includes assets from both employee and employer Participants in the 401(k) plans in the 1996 EBRI/ICI 0–2 2–5 5–10 10–20 20–30 > 30 All sales of businesses by the employer. Distributions of elective contributions will are lower shares of assets in all other types of plan 20s 30s 40s 50s 60s All plans (covering 92 percent of employees) intend to comply with ERISA Insurance company general accounts are probably primarily GICs. Outstanding Loans 0% all, while 6.9 percent had less than 20 percent allocated cago, IL: The University of Chicago Press, 1998. vestment Decisions: An Analysis of Large 401(k) Plan and account balance. Individuals between the ages of 0% with a guarantee (typically by the insurance company or bank) to provide for 1994 of $26,766. However, the Goodfellow and Schieber (1997) study of Cerulli Associates, Inc. (1998). Organization sufficiently broad range of investment alternatives that have materially assets are for 1996. Hinz, McCarthy, and Turner (1997) investigate asset in the private pension system. The overall number of 0% • The average balances of older workers with long tenure at one employer indicate that 20s Total 30s Total 40s Total 50s Total 60s Total Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data by Age Goodfellow, Gordon P., and Sylvester J. Schieber. “In- ........................................................................ 18 263–289. participant in the plan had an outstanding loan balance. This may understate 1 contributions. 20 Years Years Years Years Years Years Years 2 be permitted after the employee has attained age 59 /2, or before this age in sec. 404(c) regulations. Corporate stock other than sponsor securities, government and corporate debt example, with 10 years of tenure should, on average, Papke (1998) uses the National Longitudinal Survey of Mature Women to year for which aggregate Form 5500 information is less have account balances of this magnitude. 24.5 percent of the participants have more than The Investment Company Institute is the national association of the 0–2 Age 2– 5 5–10 10–20 20–30 > 30 All Less than $10,000 More than $100,000 City/State/ZIP benefit payments according to the plan at book value. database had, on average, 44.0 percent of their plan 24 plans found an average balance of $38,234, and a recent study by the Profit investments. The share of assets held in equity funds Less than $10,000 More than $100,000 different risk and return characteristics. See sec. 404(c) of the Employee allocations among Federal Thrift Savings Plan Collection Project. to equity funds (table 6). At the other extreme, 24.5 per- T Poterba, James M., Steven F. Venti, David A. Wise. “Im- ables the number of plans offering loans (or participants eligible for loans) because Data.” 30 and 59 are more likely to have a loan outstanding EBRI Issue Brief No. 176 (Employee Benefit 19 16 Age private plans increased from 489,000 in 1980 to 690,000 a mature 401(k) plan program will produce substantial account balances. For the case of a hardship. For hardship withdrawals, however, the amount Years Years Some larger plan data were excluded because there were “strong financial incentives to invest in Years Years Chart 15, Loan Ratios for Participants With Loans, securities, and cash reflect holdings of pooled investments other than analyze 232 participants in defined contribution plans. The reported Years Conventional correlation statistics for the three pairs of data series are 99, vestment of Assets in Self-Directed Retirement Years Years Tenure 22 American investment company industry. Its membership includes Bureau of National Affairs. “Individual Account Plans: 7,373 open- 4 For convenience, minor investment options are not shown. Sharing/401(k) Council of America indicated that the average balance for Address Retirement Income Security Act of 1974, as amended, and regulations issued participants, and Ameriks, King, and Warshawsky available on a basis in which pooled fund assets reported 12 have accumulated a larger plan balance than a 30-year- This figure is computed by combining equity funds, employer stock, and the The concentration of loans in large plans means that However, more than 30 percent of participants 80 percent of their plan balances invested in equity some plans may have offered, but had no participants take out, a plan loan. Some, but not all, of the administrators provided data on incomes, marital Note: Minor investment options are not shown, therefore, row percentages will 14 balance invested in equity funds, 19.1 percent invested available is limited to the elective contributions themselves; investment income Some providers were unable to provide complete asset allocation detail on company stock.” The year in which the data were collected was not identified; however, a subsequent registered investment companies. Registered investment companies are mutual 92, and 99 percent, respectively. investment choices, however, suffer the same constraints as the SCF. cent of the participants had more than 80 percent of the end investment companies (“mutual funds”), 450 closed-end investment plications of Rising Personal Retirement Saving.” Tenure Research Institute, August 1996). than younger or older workers. Similarly, participants Your Name in 1994, the latest year for which data from the Depart- participants in their survey was $75,000 in 1996 (Bureau of National Affairs, example, individuals in their sixties with at least 30 years of tenure have average thereunder. (1997) perform a similar analysis on the TIAA-CREF equity portion of balanced funds. The latter is based upon the portfolio by Tenure Plans.” In Michael Gordon, Olivia S. Mitchell, and ................................................................... 18 Group Reports Increase In Balances, Participation Table 1, Plans, Participants, Assets, and Average Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan status, gender, and withdrawals. The number of administrators with However, the U.S. General Accounting Office (1997a, p. 4) found that over not add to 100 percent. 23 Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Source: Tabulations from EBRI/ICI Participant-Directed Retirement most participants in 401(k) plans have borrowing on such contributions can be included only if it is earned before December 31, by plans have been redistributed to the underlying asset A comparison of the four combinations of investment offerings by age in their sixties with 20 to 30 years of tenure certain pooled asset classes for one or more of their clients. Any plan in which funds, whereas 6.9 percent have less than 20 percent Source: Tabulations from EBRI/ICI Participant-Directed Retirement publication (Clark, Goodfellow, Schieber, and Warsick, 1998) used data collected from 87 401(k) funds and variable annuities registered with the Securities and Exchange old with two years of tenure. This positive relationship is companies, and nine sponsors of unit investment trusts. Its mutual fund in company stock, 15.1 percent in GICs, 7.8 percent in Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. 1998). The latter number could be considered as an upper bound since it City/State/ZIP Technological feasibility and additional regulatory clarification from the population. acomposition of balanced mutual funds, which typically hold 60 percent of 21 plan balances invested in equity funds. The remaining NBER Working Paper No. 6295. Cambridge, MA: Na- with short or long periods of tenure tend to borrow information on these variables in 1996 was not sufficient to allow inclusion of 95 percent of 401(k) plans that offer loans had at least one plan participant All asset allocation averages are expressed as a dollar-weighted average ment of Labor are available (U.S. Department of Labor, 24 Data Collection Project. account balances in excess of $156,000; those in their fifties have balances in excess Guaranteed investment contracts. Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. Chart 16, Loan Ratios for Participants With Loans, Data Collection Project. Marc Twinney, eds., Positioning Pensions for the 1988 (for calendar year plans). If employer contributions have been included (panels B–E) yields similar findings about the effect of investment options on at least 90 percent of all plan assets could not be identified was excluded from Plan Data Collection Project. We were able to match the source of contributions with the fund informa- Rates.” BNA Pension Reporter. Vol. 25. No. 41 (Octo- plans at the end of 1995. Commission. These investments would include stock, bond, money, and Plan Data Collection Project. members have assets of about $5.061 Account Balances, by Plan Size (Measured in trillion, accounting for approximately includes profit-sharing and combination plans as well as 401(k) plans. U.S. Department of Labor (DOL) in 1992 accelerated the formation of shown in chart 6, which plots the average account privileges. In the database, 70 percent of participants categories. In that year, plans with 100 or more partici- with their current employer have account allocated to equity funds and 30.6 percent hold no assets in equity securities. See Investment Company Institute, Quarterly balanced funds, 6.8 percent in bond funds, 5.4 percent in these variables and still maintain the confidentiality of providers. Thus, the with an outstanding loan. unless otherwise indicated. with less frequency than other participants. Finally, 38.0 percent had allocations in equity funds ranging in the ADP (actual deferral percentage) test, only these contributions and asset allocation. the analysis. tion for a subset of the data providers in our sample. balanced funds. of $117,000. participant-directed plans under ERISA sec. 404(c). by Account Balance Twenty-First Century. ................................................... Philadelphia, PA: University of 19 ber 19, 1998). Supplemental Data. Mail to: EBRI, 2121 K Street, NW, Suite 600, Washington, DC 20037 Participants) ................................................................ 7 current analysis does not consider these variables. Mail to: EBRI, 2121 K Street, NW, Suite 600, Washington, DC 20037 or Fax to: (202) 775-6312 or Fax to: (202) 775-6312 EBRI Issue Brief Number 205 • January 1999 • © 1999. EBRI 14 4 18 22 12 6 2 16 8 10 20 January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief January 1999 • EBRI Issue Brief 19 13 11 15 17 21 9 7 5 3 1 Percentage of Participants With Account Balances in Specified Range Percentage of Participants With Account Balances in Specified Ranges Issue Brief Issue Brief Plans With Loans Percentage of Participants With Account Balances in Specified Range Loan Ratio Percentage of Participants With Account Balances in Specified Range

Volume 205

Pages 22

EBRI Issue Brief

Jack VanDerhei

Russell Galer

Carol Quick

John Rea

Retirement