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November 2016  Volume 14, Number 11        

nest eggs

Consistency Creates Big 401(k) Nest Eggs

A new study looked at 401(k) account balances of workers from 2010 to 2014. Participants who consistently contributed had balances almost twice the average account balance of other plan participants.

The study by the Employee Benefits Research Institute and the Investment Company Institute found the average 401(k) plan account balance for consistent participants increased at a compound annual average growth rate of 17.3 percent to $138,553 by the end of 2014. The median (mid-point) 401(k) plan account balance for consistent participants increased at a compound annual average growth rate of 19.7 percent to $56,653 by the end of 2014. That’s more than three times the median balance across all participants at the end of that year.

“Looking at average balances for all 401(k) accounts does not reflect the system’s full potential for workers building their retirement resources,” Sarah Holden, the Investment Company Institute’s senior director of retirement and investor research, said in a statement. “By studying the experience of workers who participate consistently across several years, this study shows more accurately the extent to which steady, paycheck-by-paycheck saving and compounding investment returns can help workers accumulate a sizable retirement nest egg.”

The study, titled “What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2010–2014,” examined the 401(k) accounts of nearly 9 million “consistent participants”—those who remained active in the same 401(k) plan for the four-year period. The study found that the average account balances increased during this period for consistent participants in all age cohorts. The growth reflects contributions of employers and workers, in addition to investment returns, withdrawals, and loans.

“The extensive EBRI/ICI database provides us with an unparalleled opportunity to analyze how American workers saving in 401(k)s over time are faring,” Jack VanDerhei, EBRI’s director of research, said in a statement. “The analysis used in this report controls for the impact of job changes as well as new entrants into the 401(k) system (with relatively small balances) replacing those exiting the system after years of participation.”

The study found that younger participants or those with smaller year-end 2010 balances, experienced higher percent growth in their account balances compared with older participants or those with larger year-end 2010 balances.

“Three primary factors affect account balances, contributions, withdrawal and loan activity, and investment returns,” the authors wrote. “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 growth rate of 44.1 percent per year between year-end 2010 and year-end 2014.”

The asset allocation of the 8.8 million 401(k) plan participants in the consistent group was broadly similar to the asset allocation of the 24.9 million participants in the entire year-end 2014 EBRI/ICI 401(k) database. On average at the end of 2014, about two-thirds of the 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. Younger 401(k) participants tended to have higher concentrations in equities than older 401(k) participants.

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In this issue:

This Just In...

Is Your Health Plan Ready for 2017?

Wellness Programs Work…If Employees Participate

Consistency Creates Big 401(k) Nest Eggs

Voluntary Benefits Help Reduce Financial Stress



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