Summary
Defined contribution (DC) plans are one of the primary means by which Americans save for retirement, and 401(k) plans are the most common type of DC plan. In an ongoing collaborative effort, the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) collect annual data on millions of 401(k) plan participants to present an accurate portrayal of the behavior of 401(k) plan participants.
This report updates EBRI and ICI’s research of 401(k) plan participant activity through year-end 2004, and notes several key findings:
• Consistent participation in 401(k) plans remains essential to successful saving: Consistent participation has had a significant impact on individuals’ ability to accumulate sizeable gains in 401(k) account balances since 1999. By year-end 2004, the average account balance among 401(k) participants who had held accounts since at least 1999 increased by 36 percent, despite experiencing one of the worst bear markets for stocks since the Great Depression. Comparing a consistent sample of participants such as this provides the most meaningful analysis of 401(k) trends, as opposed to year-to-year “snapshots” that change as older, high-account workers leave the 401(k) system and younger, low-account workers enter. Notably, older and longer-tenured participants have higher-than-average balances, and younger and shorter-tenured participants have smaller-than-average balances.
• Equity investing remains popular in 401(k) plans: The bulk of 401(k) participants’ assets remained in equity securities at year-end 2004. On average, 67 percent of participants’ assets are invested in equity securities through equity funds, the equity portion of balanced funds, and company stock.
• Investment preferences are shifting to simpler options: Lifestyle and lifecycle funds have increased in popularity in recent years among both plan sponsors and plan participants due to increasing concern that many participants require investment guidance and/or simpler investment choices. For example, recently hired 401(k) plan participants in their 20s currently hold a higher percentage of their 401(k) accounts in balanced funds—which include lifestyle and lifecycle funds—than their peers did in 1998.
• Loans are widely available, but rarely taken: Although research indicates that permitting loans increases both participation and contribution rates in 401(k) plans, concern exists that individuals will undo those benefits by taking the money out prior to retirement. However, loan activity among 401(k) plan participants continues to be limited: In 2004, 19 percent of participants in plans that offered loans have loans outstanding. On average, among participants with loans, the loan represents 13 percent of the remaining account balance at year-end 2004.