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EBRI/ICI Report on 401(k) Plans

Everyone knows that defined contribution plans play an increasingly important role in Americans' retirement security. However, only one group can provide the details for 40 percent of the estimated 43 million workers who participated in 401(k) plans at year-end 2004 and invested over $926 billion in assets. Needless to say, the Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI) Participant-Directed Retirement Plan Data Collection Project for 2004 provides a wealth of information on not only how 401(k) investors are doing, but also on how they have reacted to the challenges of the financial markets in planning for their retirement security. This article highlights some of the general trends from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project and also highlights the study's findings on stable value funds.

EBRI/ICI Project Demographics
The following table provides an interesting overview of the plans, number of participants, total assets, and average account balances in the Project. As expected, the largest plans, those with over 10,000 participants, dominated the Project universe and accounted for 47 percent of participants and 55 percent of total assets even though they represented only 1 percent of overall plans in the Project. Conversely, plans with less than 250 employees represented 80 percent of the plan universe, 11 percent of participants, and 8 percent of assets. Please see EBRI/ICI Directed Retirement Plan Data Demographics Table.

EBRI/ICI Project Compared to SVIA
SVIA's Ninth Annual Investment and Policy Survey for Stable Value Funds as of year-end 2004 covered almost 98,000 plans-all of which offered a stable value fund as part of their investment option menu. The survey reported over $419 billion in stable value assets. Within the Project universe, only 55 percent of plans offered a stable value fund as part of their investment option menu. The Project also found that almost 55 percent of participants had access to a stable value fund investment option. On an asset basis, almost 59 percent of the assets covered in the Project had a stable value fund investment option available. The Project also reported that overall asset allocation to stable value was 12 percent, or $110 billion. Please see Distribution by Plan, Distribution by Participants, and Distribution by Assets Graphs.

Overview of Asset Allocation
The Project observed that 401(k) participants' asset allocation was consistent with a long-term investment horizon given a higher allocation to stocks (equities and company stock) and that allocation changed slightly over the past eight years. They also found that Life Style¹ and Life Cycle funds², which are included in the Project's balance fund category, had grown steadily over the eight years. Please see Asset Allocation 1996-2004 for graph.

In fact, the observation that asset allocation was consistent with a long-term investment horizon is demonstrated when asset allocation is reviewed based on the age of investors. The Project reported that equity investment remains most popular with younger workers. Conversely, as investors mature, their equity allocation decreases and their investment allocation to conservative options--stable value, bonds and money markets--increases. Please see Equity Allocation Table.

Asset Allocation, Investment Menu, and Age
A key determinant of asset allocation is what is offered in the investment option menu. As discussed earlier, only two out of the four investment option menus covered in the Project included stable value. The Project found that the average asset allocation for plans with a stable value fund increased substantially from the Project-wide average of 12 percent to 21.5 percent in plans with stable value and to 20.1 percent in plans with stable value and company stock.

As reported earlier, as investors age, they decrease their allocation to equities (equities and company stock) and increase their allocation to conservative investments (stable value, bond, and money market funds). The Investment Menu and Participants' Age Influence Asset Allocation table shows not only this shift to conservative investments but also demonstrates that when stable value funds are available, they gather the lion's share of assets among their conservative counterparts.

As investors age, stable value funds also tend to fare well compared to balanced funds in terms of attracting assets. As the table shows, stable value allocations exceed balanced funds for age groups 30 and above.

The table also demonstrates another observation for stable value funds. That is, stable value is often used by 401(k) investors to complement allocations to company stock. Please see Investment and Age Table.

Account Balances and Savings
The Project reported that the average 401(k) account balance of all participants at year-end 2004 was $56,878, up from the year-end 2003 level of $51,569. When a consistent sample representing 40 percent of all participants in the Project was compared, the Project reported that average account balances increased 36 percent, rising from $67,016 in 1999 to $91,042 in 2004. The Project says that in 2004 alone, the average account balance among this consistent group of participants increased 15 percent, due in part to positive equity returns. The Project also attributes this growth to net contributions each year and stock market appreciation since 2002.

The news was not all rosy for the consistent sample group. The Project found that average account balances of older workers had not yet recovered from the impact of the bear market. They reported that for the 60s age group, average account balances were still down by nearly 5 percent in 2004 compared to 1999. They explained that the slower recovery reflected the key role that investment returns play on these typically larger account balances, while annual contributions are able to provide only a minor boost to large account balances. Finally, in some cases, older workers were starting to withdraw from their 401(k) account balances. Please see Average Account Balance Table.

Conclusion
Defined contribution plans are a major source of retirement security. The EBRI/ICI Project shows that 401(k) investors are taking advantage of their 401(k) plans and investment options. The Project demonstrates that when stable value funds are available, they are the preferred choice among conservative investment options. Clearly, stable value funds will continue to play a major role in helping 401(k) investors achieve retirement security.

¹Life Style funds are those that are tailored to an individual's specific risk tolerance and reflect that risk level. Typically, they are tailored to offer a conservative risk, moderate risk, and aggressive risk.
² Life Cycle funds adjust risk over time based on an individual's age and/or investment horizon. They typically rebalance portfolios to become more conservative and income-producing as an individual ages or gets closer to retirement