WASHINGTON — Finally! Some good news on employee participation in 401(k) plans.
After years of stagnation, the average 401(k) balance has gone from $67,760 at the end of 1999 to $121,202 at the end of 2006, according to a new study from the Employee Benefit Research Institute and the Investment Company Institute.
"The average 401(k) participant had a good year in 2006 because the majority of 401(k) assets are invested in equities and the stock market did very well last year," said study co-author Jack VanDerhei, Temple University and EBRI Fellow. "But year-to-year comparisons can vary sharply, which is why it's far more meaningful to look at how participants' accounts have performed over time. The data show that most workers who have continued to save and invest in their 401(k) retirement plans over the past several years have done well, despite ups and downs in the stock market."
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The EBRI/ICI tracked participants in 401(k) plans from 1999 to 2006 each of whom held an account at the same employer during that time period. In total, the project's database contains a snapshot of account information at yearend 2006 for 20 million 401(k) plan participants.
The study notes that the averages vary widely by age and job tenure, since new contributions tend to have a greater impact on younger, shorter-tenured workers' 401(k) accounts and market returns tend to have a greater impact on older, longer-tenured workers' accounts. Increases reflect added contributions and the impact of equity market returns on account assets, as well as any loan or withdrawal activity.
Most 401(k) assets are in stock, according to the data. The popularity of life-cycle funds, which shift investments to "less risky" assets as people approach retirement, continues to rise, especially among new or recent hires, according to the data. The study also found that in 2006, 18% of 401(k) participants eligible for loans had taken one against their accounts. Most loans tended to be small, amounting, on average, to 12% of the remaining account balance.
Meanwhile, the share of 401(k) accounts invested in company stock continues to shrink, the data showed. The share of 401(k) participants' investments held in their employer's stock dropped 2 percentage points to 11% in 2006, continuing a steady decline that began in 1999.
The study also reported that aggregate averages can mask the wide range of rates of change in account balances of consistent participants over time. For example, the average account balances among consistent participants in their 20s rose 40.9%, on average, annually from 1999 through 2006. Because this group tends to start with small accounts, new contributions have a large impact on their balances, according to the data.
In contrast, the average account balance for consistent participants in their 60s rose nearly 3.7% annually over the same period. For these savers, many of whom started the period with significant account balances, annual contributions generally provide only a minor boost. In addition, participants in their 60s are more likely to make withdrawals from their accounts.
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