401(k) Savers Who Stuck Out Financial Crisis Reaping Rewards

ICI, EBRI report finds that consistent savers from 2007 to 2012 saw an average 6.8% growth rate despite 2008 crash

The traditional "three-legged stool" of retirement savings has become a pyramid with five components, Lynn Dudley said. The traditional "three-legged stool" of retirement savings has become a pyramid with five components, Lynn Dudley said.

Workers who saved consistently in a 401(k) plan during the five years that included the financial crisis are reaping the rewards.

So says a newly released study by the Employee Benefit Research Institute and the Investment Company Institute, which found that the average account balance of workers who participated consistently in a 401(k) plan from year-end 2007 to year-end 2012 increased at a compound average annual growth rate of 6.8% during that period, despite a 34.7% drop in that group’s average 401(k) account balance in 2008.

The increase in account balances reflects several factors, EBRI and ICI said, including employer and worker contributions, investment returns, withdrawals and loans.

The study, “What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2007–2012,” also found that at year-end 2012, the average account balance of the consistent participants was 67% higher than the average account balance among all participants in the EBRI/ICI 401(k) database.

The consistent group’s median balance increased at a compound annual average growth rate of 11.9% over the period, to $49,814 at year-end 2012 — almost three times the median balance across all participants at year-end 2012, the study found.

The study looked at the accounts of approximately 7.5 million consistent participants among the 24 million participant accounts in the EBRI/ICI 401(k) database, over the five-year period from year-end 2007 to year-end 2012.

Sarah Holden, ICI’s senior director of retirement and investor research and co-author of the study, said in a statement that the research provides “a meaningful analysis of the potential for 401(k) participants to accumulate retirement assets because it examines how a consistent group of participants’ 401(k) accounts change over time.” The research, she added, “highlights that contributing and investing in a 401(k) plan consistently results in higher average account balances than the average balance for all plan participants.”

Indeed, during a Tuesday event held at the Bipartisan Policy Center in Washington titled "Retirement Security: What’s Working and What’s Not?" Lynn Dudley, Senior vice president of policy at the American Benefits Council, noted that participation in defined contribution plans like 401(k)s continues to be a crucial part of a secure retirement.

Dudley noted that the “three-legged stool” of retirement funding — Social Security, personal savings and retirement plan savings — has shifted to a “new paradigm” — the pyramid.

The pyramid, she said, includes five broad components: Social Security; homeownership; employer-sponsored retirement plans; individual retirement accounts (IRAs), including rollovers; and other assets.

The EBRI/ICI study also found that more consistent 401(k) plan participants held target date funds at year-end 2012 than at year-end 2007.

Jack VanDerhei, EBRI research director and co-author of the study, said in the statement that the survey data “confirm the continuing important role of target date funds in 401(k) plans, revealing that a substantial core of consistent 401(k) participants who held at least some target date fund assets in their account before the financial crisis, still did so at year-end 2012.

At year-end 2012, nearly one-third of those holding any target date fund assets invested all of their 401(k) balances in target date funds, he said.

At year-end 2007, 27.6% of consistent 401(k) plan participants held at least some target date fund assets in their 401(k) accounts, though by year-end 2012, that share had risen to 32.1%, the study found.

More than two in five (43.7%) consistent 401(k) participants in their 20s had target date funds in their 401(k) accounts at year-end 2012, compared with 28.4% of consistent 401(k) participants in their 60s.

The ICI/EBRI study also found that consistent 401(k) participants concentrated their accounts in equity securities.

Asset allocation in the consistent group was broadly similar to that of the participants in the entire year-end 2012 database, with both groups tending to concentrate their accounts in equity securities, the survey said.

“On average, about three-fifths of 401(k) participants’ assets were invested in equities, either through equity funds, the equity portion of target-date funds, the equity portion of non target-date balanced funds, or company stock," the report said. "Younger 401(k) participants tend to have higher concentrations in equities than older 401(k) participants.”

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