401(k) Balances Were Steady In 2000, Despite Market Volatility

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Despite experiencing losses on equity returns in 2000, a substantial number of 401(k) participants did not alter their account activity in that year, even though many of them have plan assets invested directly or indirectly in the stock market.

These are findings from a recently released issue brief of the asset allocation, account balances and loan activity of 11.8 million 401(k) participants by the Employee Benefits Research Institute, a nonpartisan public policy research organization based in Washington, and the Investment Company Institute, also based in Washington.

According to the brief, 51% of plan balances were invested in equity funds, 19% in company stock, and 8% in balanced funds. The average account balance of participants who held accounts in both 1999 and 2000 decreased by 0.1% in 2000.

The finding does not surprise Jack VanDerhei, research director of the EBRI Fellows Program and co-author of the issue brief. Since people who invest in a 401(k) plan are long-term investors, they tend to focus on long-term results and are therefore not likely to make changes to their asset allocation every time the market takes a downturn.

Co-author Sarah Holden, senior economist in the research department at ICI, agrees. She suspects account activity has remained largely unchanged from 1999 to 2000 “because 401(k) participants are long-term investors who are not ruffled by market volatility; they stick to their long-term goal of saving for retirement.”

The volatility in the financial markets in 2000 also had little impact on plan participants loan behavior, according to the brief. At year-end, only 18% of eligible participants had outstanding loans.

Younger participants tend to invest more heavily in stocks than their older counterparts, and less in guaranteed investment contracts and bond funds than participants in their 60s, the brief says.

Company stock is more or less appealing depending on age as well, according to the brief. Participants in their 20s allocated 15% of their plan balance in company stock; those in their 40s put 20% in; and participants in their 60s put only 16% into company stock, according to the brief.

When employers require participants to place a portion of assets in company stock, their overall contribution to equities is higher than that of participants not required to buy company stock, the brief says. This holds true across age groups.

Allocation of assets into equity funds tends to diminish as participants age and accumulate time at their place of employment, the brief says.

“For example, 28% of participants in their 20s have no equity investments, compared with 42% of participants in their 60s,” according to the brief. “Similarly, 25% of participants with two or fewer years of tenure have no equity fund investment, compared with 44% of participants with more than 30 years of tenure.”

However, as salaries increase, so does the percentage of participants who place a portion of their contribution into equity funds, according to the brief.

“For example, about 30% of participants earning between $20,000 and $40,000 a year hold no equity funds, compared with 15% of participants earning in excess of $100,000 a year.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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