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Here’s Why it’s Vital to be a Consistent 401(k) Saver

Practice Management

A recent study of the EBRI/ICI 401(k) database analyzing trends in the average plan account balance of consistent participants underscores the powerful compounding effect of ongoing participation.

The study, which analyzed active 401(k) participants who maintained accounts with the same plan sponsor each year from 2010 through 2019, found that at the end of 2019, 33% of the active group had more than $200,000 in their 401(k) plans at their current employers, while another 20% had between $100,000 and $200,000. 

In contrast, in the broader EBRI/ICI 401(k) database, only 11% had accounts with more than $200,000 and 9% had between $100,000 and $200,000.

Specifically, What Does Consistent Participation in 401(k) Plans Generate? "Changes in 401(k) Plan Account Balances, 2010–2019," a study by ICI’s Sarah Holden and Steven Bass and EBRI’s Craig Copeland, tracked the account balances of 1.3 million 401(k) plan participants who had accounts in the year-end 2010 EBRI/ICI 401(k) database and each subsequent year through year-end 2019. 

Among the key findings is that the average 401(k) plan account balance for consistent participants rose each year from 2010 through year-end 2019, except for a slight decline in 2018. Overall, the average account balance nearly quadrupled, increasing at a compound annual average growth rate of 15.6% from 2010 to 2019, rising from $58,658 to $216,690 at year-end 2019.

The median 401(k) plan account balance for consistent participants increased at a compound annual average growth rate of 18.8% over the period, to $108,433 at year-end 2019. What’s more, the growth in 401(k) plan account balances for consistent participants generally exceeded the growth rate for all participants in the database. By year-end 2019, more than half (53%) of the consistent 401(k) plan participants had account balances of more than $100,000, compared with about a fifth of 401(k) participants in the entire EBRI/ICI 401(k) database.

The study also observes that because younger participants’ account balances tended to be smaller, their contributions produced significant percent growth in their account balances. In contrast, the average account balance of older participants, or those with longer tenures—both of whom tended to have larger balances at the beginning of the study period than younger workers or those with shorter tenures—showed more modest percent growth in account size. 

For instance, the percent change in average 401(k) plan account balance of participants in their 30s was heavily influenced by the relative size of their contributions to their account balances and increased at a compound average growth rate of 26% per year between year-end 2010 and year-end 2019. In contrast, the average account balance of 401(k) participants in their 60s increased at a 12.2% compound annual average growth rate between 2010 and 2019.

Additional findings show that 401(k) participants tend to concentrate their accounts in equity securities. The asset allocation of the 1.3 million 401(k) plan participants in the consistent group was similar to the asset allocation seen in the annual EBRI/ICI 401(k) database updates, the study notes.  

On average at year-end 2019, more than two-thirds of consistent 401(k) participants’ assets were invested in equities—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 also tend to have higher concentrations in equities than older 401(k) participants.

Why This Group Matters

The paper explains that it is important to study consistent participants because the average 401(k) account balance for the entire database can be affected by 401(k) participants entering and leaving the database as they change jobs or retire, and by plan sponsors entering and leaving the database as they change recordkeepers. 

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. As such, studying consistent participants allows for a more in-depth analysis of the potential for 401(k) participants to accumulate retirement savings over time.

“401(k) plans remain one of the most important avenues toward a secure retirement, and the account growth for consistent 401(k) plan participants highlight the power of this important saving and investing tool,” says Holden. “While markets can be volatile, the compounding growth and upward trends we observed during the nine-year study periods shows the benefit of staying the course in their 401(k) plans."