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Home > Library > Stable Times > Volume 4, Issue 1  The quarterly publication of the Stable Value Investment Association First Quarter 2000 • Volume 4 Issue 1 401(k) Investing - A Look At The DataBy Dallas Salisbury, EBRI As 401(k) retirement plans have grown to be a significant part of the private pension landscape in the United States, interest in examining the behavior of 401(k) plan participants also has grown. The project has now collected data for year-end 1997 and year-end 1998. The purpose of this article is to report findings from the year-end 1998 data.1 The 1998 EBRI/ICI database accounts for 11 percent of all 401(k) plans, 22 percent of all 401(k) participants, and about 27 percent of the assets held in 401(k) plans. Findings This analysis of the 1998 data updates the analysis of the 1996 data and reports on 401(k) participant asset allocation, participant account balances, and loan activity. The results for year-end 1998 are broadly similar to those for year-end 1996. In addition, this analysis presents data regarding asset allocation by plan size and examines the changes in the accounts of certain participants who were included in the 1996, 1997, and 1998 studies. Asset Allocation For all 401(k) participants in the 1998 EBRI/ICI database, almost three-quarters of plan balances are invested directly or indirectly in equity securities. Specifically, 49.8 percent of total plan balances are invested in equity funds, 17.7 percent in company stock, 11.4 percent in guaranteed investment contracts (GICs), 8.4 percent in balanced funds, 6.1 per- cent in bond funds, 4.7 percent in money funds, and 0.3 percent in other stable value funds. The asset allocation of participants' account balances varies with age. Younger participants' assets tend to be more concentrated in equity fund investments, while older participants invest more heavily in fixed-income assets. Investment options offered by 401(k) plan sponsors influence participants' asset allocation. Plans offering the basic investment options of equity, balanced, bond, and money funds tend to have the highest allocations to equity funds. The addition of GICs to the four basic investment options reduces the relative allocations to all other investment options, particularly bond funds and money funds. Alternatively, the addition of company stock to these options substantially reduces the allocation to equity funds and balanced funds.
Employer contributions in the form of company stock affect participants' asset allocation behavior. Participants in plans in which the employer contribution is required to be invested in company stock have a higher percentage of their self-directed account balances in company stock and lower percentages invested in equity funds and balanced funds, compared with participants in plans with no employer-directed contributions. The allocation of plan balances to equity funds varies across participants. Indeed, about 28 percent of participants have more than 80 percent of their account balances invested in equity funds, while about 28 percent hold no equity funds at all. However, about two-thirds of those participants with no equity funds have exposure to equity securities through balanced funds or company stock. As a result, overall equity-related investments of those holding no equity funds are 44.6 percent of plan balances. Asset allocation varies with participant salary. In particular, the percentage of account balance invested in equity funds rises with salary, while the percentage invested in GICs declines as salary rises (see Figure 2). Account Balances The average account balance (net of plan loans) for all participants was $47,004 at year-end 1998, which is 26 percent higher than the average account balance at year-end 1996. The median account balance was $13,038 at year-end 1998. The reported account balance represents retirement assets in the 401(k) plan at the participant's current employer. Retirement savings held in plans at previous employers or rolled over into individual retirement accounts (IRAs) are not included in this analysis. Almost one-half of participants have account balances of less than $10,000 in the 401(k) plan at the participant's current employer, while 13 percent have balances greater than $100,000. Those individuals with account balances of less than $10,000 are primarily young workers or workers with short tenure at their current employer. In contrast, those with account balances in excess of $100,000 are primarily older workers or workers with long tenure, who have accumulated larger account balances through years of contributions and the compounding of investment returns (see Figure 3). The ratio of account balance to 1998 salary varies with salary, increasing slightly as earnings rise from $20,001 to $80,000, and falling a bit for salaries greater than $80,000. The increase in ratio likely reflects a greater propensity of higher-income participants to save, whereas the decline after $80,000 results from contribution and nondiscrimination rule constraints. The ratio of account balance to 1998 salary varies with age and tenure. Older participants, who have had more time to accumulate balances, have higher ratios than younger participants. Similarly, within a given age group, participants with more years of tenure have higher ratios than those with less tenure (see Figure 4). Plan Loans Fifty-six percent of the plans, accounting for 80 percent of the participants, offer loans to plan participants. The probability of a plan sponsor offering plan loans to its employees increases with plan size. Indeed, about 90 percent of plans with more than 10,000 participants offer a loan provision, while less than half of plans with 10 or fewer participants do so. Among participants eligible for loans, 16 percent had outstanding loans at the end of 1998. Loan activity varies with age, tenure, and account balance. Participants between age 30 and 59 are more likely to borrow than older or younger workers. Similarly, individuals with short or long periods of tenure are less likely than other participants to have a loan outstanding. Finally, participants with account balances of less than $10,000 tend to borrow less frequently. For those with outstanding loans at the end of 1998, the level of the unpaid balance represents 14 percent of the account balance, net of the unpaid loan balance (see Figure 5). Participants' Accounts, 1996-1998 Approximately 3.3 million (or 50.3 percent) of the participants present in the 1996 EBRI/ICI database also are in the 1997 and 1998 EBRI/ICI databases. Three-quarters of these participants generally held about the same percentage of equity securities in year-end 1996 and year-end 1998. The median growth in account balance between 1996 and 1998 was 86 percent among all participants present in 1996, 1997, and 1998, in part reflecting strong stock market performance. For a given age group, median account growth (measured in percentage terms) tends to fall as tenure increases, primarily because initial account balance rises with tenure. Within any given tenure range, younger participants experience a higher percentage median account growth than older participants, in part because of their higher exposure to equity securities (see Figure 6). Conclusion Total 401(k) assets are more heavily invested in equities (defined broadly to include employer securities) than the universe of defined benefit plans. Nearly one fifth of participants have more than 80% of their account balance in equities; while one sixth have no money in equities. As a result, long term returns will vary substantially. Participants did not appear to have an asset allocation target that they rebalanced to during the 1996 to 1998 period. This suggests that education continues to be a significant need, with the possibility of a need for active investment advice or direction for many participants in order to assure diversification and re-balancing. Related to proposals for Social Security Individual Accounts, it underlines the need to do analysis based upon alternative asset allocations, not one averaged allocation, in order to reflect the likely range of outcomes if investment discretion is provided. 1999 data is now being entered into the EBRI/ICI database which will be released in the months ahead (see Figure 7 and Figure 8).
1 Summary figures for year-end 1997 are available at ICI's Web site at www.ici.org/pdf/per06-01_appendix.pdf. Hardcopy may be requested by calling ICI's Research Department. The 1997 EBRI/ICI database contains 29,899 401(k) plans with $290 billion of assets and 7,056,418 active participants.
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