Consistency Is King When It Comes to 401(k) Contributions

Every year, the Investment Company Institute (ICI) and the Employee Benefit Research Institute (EBRI) update their study on the impact of consistent participation in a 401(k) plan.

The previous update, “What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2007–2012,” found that defined contribution (DC) accounts at the end of 2012 were rebounding from the financial crisis, and that participants who held steady on contributions ended the period with an average account balance that was 67% higher than the average among all participants in the database.

The financial crisis of 2008, which substantially ate into 401(k) balances with an average 25.8% plunge, was followed by a gradual rise from 2009 through the end of 2013. Overall, the average balance rose at a compound annual average growth rate of 10.9% from 2007 to 2013, to $148,399 at year-end 2013.

This year’s results, which cover the period 2007 through 2013, saw a median balance among those consistent 401(k) contributors that was more than four times that of all participants at the end of 2013. Between 2012 and 2013, the average 401(k) account balance increased substantially, according to the latest data from EBRI and ICI.

Consistent contributors saw an even greater rate of growth. The median 401(k) account balance for these participants increased at a compound annual average growth rate of 15.8% over the period, to $75,359 at year-end 2013. Several factors—including employer and worker contributions, investment returns, withdrawals, and loans—were responsible for the increase.

Account balances tended to increase with age as well as tenure among the consistent group of participants, the same way as with the rest of the database. The younger the participant or the shorter amount of time in a job, the smaller the account balance tended to be.

Within the group of consistent contributors, 401(k) participants with 10 to 20 years of tenure at year-end 2013 who were older tended to have higher balances than younger ones. Those in their 30s with 10 to 20 years of tenure had an average account balance of $88,298, compared with an average of $141,981 for participants in their 60s with 10 to 20 years of tenure. Among consistent participants in their sixties at year-end 2013, those with five to 10 years of tenure had a lower average 401(k) balance ($92,112) than those with more than 30 years of tenure ($295,747).

Consistent participants in 401(k) plans, on average, held two-thirds of their 401(k) assets in equities, through equity funds, the equity portion of target date and non-target date balanced funds, or company stock. That is similar to the asset allocation of the 26.4 million participants in the entire database.

The research found the following about consistent 401(k) participants:

• More than two in five plan participants in the consistent group had more than $100,000 in their 401(k) accounts at their current employers.
• Nearly a quarter showed balances greater than $200,000.
• Of the broader EBRI/ICI 401(k) database, only about one in five 401(k) savers had accounts with more than $100,000. Only 1 in 10 had a balance of more than $200,000. 

The study looks at the accounts of about 4.2 million consistent participants—those who remained active in the same 401(k) plan for the six-year period covering year-end 2007 to year-end 2013, out of the 26.4 million participant accounts in the entire EBRI/ICI 401(k) database at year-end 2013.

While the separate, annual update report on the EBRI/ICI 401(k) database is based on large cross sections of 401(k) plan participants with a wide range of tenure and participation experience, focusing on accounts that remain in the database for an extended period allows for a more meaningful analysis of the potential for 401(k) participants to accumulate retirement assets over time. 

“What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2007–2013” can be accessed from ICI’s website.