Investors should never underestimate the power of compounding or of regular saving. People who consistently participated in their 401(k) plans had an average account balance that was 67% higher than other participants.
Investors should never underestimate the power of compounding or of regular saving. People who consistently participated in their 401(k) plans grew their accounts by 6.8% annually during the 5-year period that included the financial crisis, according to a new study.
A study from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) found a third of 401(k) participants were considered consistent and they enjoyed a 6.8% annual growth rate despite the fact that 401(k) account balances dropped 34.7% in 2008. At the end of 2012, the average account balance of consistent participants was 67% higher than the average account balance of all participants in the database.
The study evaluated the accounts of 7.5 million consistent participants among the 24 million accounts in the EBRI/ICI 401(k) database. The researchers examined balances over a 5-year period from the end of 2007 to the end of 2012.
“This 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,” said Sarah Holden, ICI’s senior director of retirement and investor research and coauthor of the study. “The research 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.”
At the end of 2012, 15.5% of the consistent group had more than $200,000 in their accounts at their current employers compared to just 8.5% of the broader database.
The consistent participants in the database had asset allocation that was similar to the overall database. Both consistent and inconsistent participants showed a tendency to concentrate their accounts in equity securities. Younger participants tended to have a higher concentration in equities, but overall, three-fifths of 401(k) participants’ assets were invested in equities through either equity funds, the equity portion of target-date funds, the equity portion of non-target-date balanced funds, or company stock.
At the end of 2012, more consistent plan participants held target-date funds than they had at the end of 2007, according to the study. The share holding target-date funds rose from 27.6% to 32.1%. Close to half (43.7%) of consistent participants in their 20s had target-date funds in their account compared to 28.4% of consistent participants in their 60s.
“The 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,” said Jack VanDerhei, EBRI research director and coauthor of the study. “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.”