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Younger 401(k) Participants Not Shying Away from Equities

Practice Management

Market volatility and pandemic fears apparently were not enough to scare away younger 401(k) plan participants from investing in equities. 

According to a new joint study from the Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI), younger participants—as a group —had more than 80% of their 401(k) plan assets invested in equities at year-end 2020 at the height of the pandemic, compared with 56% of 401(k) plan assets among participants in their 60s. 

“Our research finds that younger 401(k) plan participants today are much more comfortable holding a significant portion of their savings in equities,” notes Sarah Holden, ICI Senior Director of Retirement and Investor Research. “At year-end 2020, nearly 80% of 401(k) plan participants in their 20s had more than 80% of their account balance invested in equities, compared with less than half prior to the global financial crisis.”

In fact, the EBRI/ICI report—401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2020—shows that ownership of investments in equities is widely embraced by 401(k) plan participants. The report, which is an update of the organizations’ ongoing research into 401(k) plan participants’ activity through year-end 2020, reveals that 94% of 401(k) participants overall had at least some investment in equities at year-end 2020. 

Notably, more 401(k) plan participants held equities at year-end 2020 than before the global financial crisis (year-end 2007), and most had the majority of their accounts invested in equities. Here, the data shows that 42% of 401(k) plan participants’ account balances were invested in equity funds, on average, in line with recent years. Another 35% of 401(k) participants’ account balances were invested in balanced funds—largely target date funds (TDFs).

That said, older 401(k) participants were much less likely to have high concentrations in equities at year-end 2020 as opposed to year-end 2007. In this case, only 15% of 401(k) plan participants in their 60s had more than 80% of their account balances invested in equities at year-end 2020, whereas 30% of 401(k) plan participants in their 60s did at year-end 2007.

Meanwhile, the study also shows that 401(k) participants’ investment in company stock continued at historically low levels. Only 4% of 401(k) assets were invested in company stock at year-end 2020, in line with recent years. This share has fallen by 81% since 1999, when company stock accounted for 19% of assets, the study notes. 

Young Savers

And while it may come as no surprise, 401(k) plans draw in many young retirement savers and new hires. At year-end 2020, 38% of 401(k) plan participants were in their 20s or 30s, and 24% were in their 40s. In addition, 43% of 401(k) plan participants had five or fewer years of tenure, including about a fifth who were recent hires (two or fewer years of tenure).

Meanwhile, another 25% of 401(k) plan participants were in their 50s, and 14% were in their 60s. Because older participants tend to have larger account balances, assets in the database are more heavily concentrated among the older 401(k) participant groups. Here, the EBRI/ICI data shows that, at year-end 2020, 63% of 401(k) plan assets were held by participants in their 50s or 60s, while 13% of 401(k) plan assets were held by participants in their 20s or 30s. 

401(k) Plan Loans

While 401(k) plan loans are widely available, they apparently are rarely taken. At year-end 2020, 84% of 401(k) plan participants were in plans allowing loans, but only 16% of 401(k) participants who were eligible for loans had loans outstanding against their 401(k) plan accounts, down from year-end 2019. 

Loans outstanding amounted to 8% of the remaining account balance, on average, at year-end 2020, the same as year-end 2019, and well below their historical average, the report notes. Loan amounts, on average, increased in 2020, but remained small relative to the remaining account balance.

“Even during the turmoil of the COVID-19 pandemic and loosening of the regulations around plan loans in 2020, the percentage of 401(k) plan participants eligible to take a loan who had an outstanding loan balance declined slightly in 2020 from 2019, to a level last seen in the early 2000s,” observes Craig Copeland, EBRI Director of Wealth Benefits Research. “At year-end 2020, only 16% of 401(k) participants who were eligible for loans had loans outstanding against their 401(k) plan accounts, showing the ability of 401(k) plan participants to hold their course in preparing for retirement during unprecedented times.”

The 2020 EBRI/ICI database includes statistical information on 11.5 million 401(k) plan participants in 76,507 plans, which hold $1 trillion in assets and cover 19% of the universe of active 401(k) participants.