October 18, 2013

Most IRA, 401(k) Balances Reached Precrisis Levels in 2011

Withdrawal activity among older investors affected average balances

The Investment Company Institute released on Thursday a pair of studies that show how far investors have come from the 2008 financial crisis.

A major indicator of how much better off savers are is their account balance, and IRA and 401(k) balances are looking much better than they were a few years ago, the studies found.

The study, “IRA Investor Profile: Traditional IRA Investors’ Activity, 2007–2011,” found that by 2011, IRA account balances for anyone younger than 70 were back up to their precrisis levels.

In 2007, the average account balance for investors between 25 and 59 was $53,620. After a steep drop in 2008, it climbed steadily to $57,550 in 2011.

The average balance for investors between 60 and 69 followed the same trajectory: $138,860 in 2007, increasing to $143,560 in 2011.

The oldest investors had a rougher ride. Their average balance in 2007 was over $186,000. After the 2008 drop-off, they started a slow climb, but 2010 saw another drop, falling from almost $171,000 to $164,230 in 2011.

IRI noted the seemingly less successful recovery in older participants’ account balances was likely to due to withdrawals. “Compared with the younger groups of traditional IRA investors,” according to the report, “these traditional IRA investors had almost no contribution activity (indeed, for most of them during most of the time analyzed they would not have been allowed to contribute), lower rates of rollover activity and much higher rates of withdrawal activity (since they were generally required to take withdrawals).”

Following the recession, the number of investors who were contributing to IRAs dropped, falling from 10.4% of investors in 2008 to 9% in 2011. Rollover activity slackened, too, with 3.2% of investors rolling over an account in 2011, down from 4.3% in 2008.

“Consistent investors in traditional IRAs largely stayed the course in investing in their traditional IRAs, reacting moderately to financial stresses during and since the financial crisis,” Sarah Holden, senior director of retirement and investor research at ICI, said in a statement. “Average account balances generally have bounced back for the consistent investors, and the data show only slight changes in these investors’ contribution, rollover and withdrawal rates.”

A report released jointly by ICI and the Employee Benefit Research Institute found average balances in 401(k) plans have recovered by almost a quarter. Between 2007 and 2011, balances increased 23.5%, the report found, despite the financial crisis cutting balances by nearly 35% between 2007 and 2008.

“The data confirm that, even through tough economic times, the discipline of 401(k) plans — staying the course by investing and continuing contributions — served savers well,” Paul Schott Stevens, ICI president and CEO, said in a statement. “Dollar-cost averaging and putting away money paycheck by paycheck have made a big difference in the bottom line for these savers.”

Participants and employers continuing to make contributions to their retirement plans was one factor in the increase, but EBRI/ICI found investment gains and reduced loan activity also contributed to the increase.

However, plans that received consistent contributions performed better than those benefiting only from better markets and fewer loans. Participants who contributed consistently had average account balances 60% higher at the end of 2011 than the average balance for all participants in the EBRI/ICI 401(k) database. The median balance for the consistent group was more than twice the median balance for the entire database.

Interestingly, younger participants with smaller initial balances saw more growth than older participants with larger initial balances.  “The percent change in average account balance of participants in their 20s was heavily influenced by the relative size of their contributions to their account balances and increased at a compound average rate of 41% per year between year-end 2007 and year-end 2011.”

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