Young 401(k) Savers Are Getting Richer

Younger 401(k) plan participants who saved consistently, as well as those with smaller year-end 2016 balances, experienced meaningfully higher growth in account balances compared with consistent older participants through 2020.

As explored in new research published by the Employee Benefit Research Institute and the Investment Company Institute, that trend in 401(k) account balance data reflects a much broader development taking root across the financial services system as the sizable baby boomer generation enters retirement and millennials approach their prime earning years.

Though their current wealth is smaller, younger people’s contributions to tax-advantaged retirement savings accounts and other investment vehicles are nearly on par with those of older workers, the EBRI-IRI data shows, and as a result, their wealth accumulation between 2016 and 2020 was larger on a percentage basis.

And while younger investors’ account growth is accelerating, baby boomers are set to start drawing down their 401(k) accounts and other sources of wealth to fund their retirement income needs — though it’s likely their balances will also continue to grow for some time yet, albeit at a substantially lower slower rate.

Ultimately, as the data bears out, tomorrow’s high-net-worth clients are today’s tech-savvy, mass affluent millennial and Gen Z investors, and much of their wealth can be expected to be concentrated in workplace retirement plans.

As such, experts agree, even the biggest and best-established wealth management and advisory firms must pivot toward this client base to reach growth goals in the future.

Digging Into the Data

According to EBRI and the ICI, three primary factors affect account balances, and these are contributions by the participant and employer, investment returns, and withdrawal and loan activity.

Between 2016 and 2020, which is the latest year for which comprehensive data is available, the average 401(k) plan account balance for consistent participants rose each year. Overall, the increases reflect a compound annual average growth rate of 19.4% over the period, with the average account balance rising from $78,008 at year-end 2016 to $158,361 at year-end 2020.

The median 401(k) plan account balance for consistent participants increased at a compound annual average growth rate of 28.3% over the period, according to EBRI and the ICI, reaching $62,134 at year-end 2020.

As noted, younger 401(k) participants and those with smaller year-end 2016 balances experienced higher percent growth in account balances compared with older participants and those with larger year-end 2016 balances.

Because younger participants’ account balances tended to be smaller, their contributions produced significant percentage growth in their account balances, the report explains.

During the study period, 401(k) participants tended to concentrate their accounts in equity securities. On average at year-end 2020, more than two-thirds of consistent 401(k) participants’ assets were invested in equities, and younger 401(k) participants had higher concentrations in equities than older 401(k) participants.

Consistent 401(k) Savers Make Great Potential Clients

The EBRI-ICI report points out that any meaningful analysis of the potential for 401(k) participants to accumulate retirement assets must examine the 401(k) plan accounts of participants who actively engaged with their accounts over all of the years being studied — i.e., consistent participants.

For example, because of changing samples of providers, plans and participants, changes in account balances for the entire database are not a reliable measure of how individual participants have fared. A consistent sample is necessary to accurately gauge changes, the report emphasizes, such as growth in account balances.

Trends in the consistent group’s account balances highlight the powerful accumulation effect of ongoing 401(k) participation. At year-end 2020, 22.2% of the consistent group had more than $200,000 in their 401(k) plan accounts at their current employers, while another 15.8% had between $100,000 and $200,000.

In contrast, in the broader EBRI-ICI 401(k) database, just 11.4% had accounts with more than $200,000, and 9.0% had between $100,000 and $200,000. Reflecting their higher average age and tenure, the consistent group also had average and median account balances that were much higher than the average and median account balances of the broader database.

Specifically, at year-end 2020, the average 401(k) plan account balance of the consistent group was $158,361, or more than 80% higher than the average account balance of $87,040 among participants in the entire EBRI-ICI 401(k) database.

Even more impressive, the median 401(k) plan account balance among the consistent participants was $62,134 at year-end 2020, nearly three and a half times the median account balance of $17,961 for all participants.

As these data points show, a given 401(k) plan participant might not meet a firm’s minimum to take them on as a wealth management client today, but that can easily change in the future. Not only are younger Americans rapidly building wealth in the workplace, many expect to get an inheritance or to profit from the future sale of a business.

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