Markets, Retirement

Consistent Participation Maximizes 401(k) Performance

9/14/16 8:00 AM

iStock_000017323851_Small-1.jpgHave your retirement assets doubled since the recession? There is a good chance that the answer is “Yes” if you have been an ongoing participant in a 401(k) savings plan. At least that is what an updated study from the Employee Benefits Research Institute (EBRI) and the Investment Company Institute (ICI) suggests after analyzing the performance differences between 401(k) participants who have consistently stayed invested in a single plan since the start of the last recession, and those who have not. Indeed, 3.5 million of the nearly 25 million 401(k) plan participants in the EBRI/ICI database maintained accounts at the end of each year from 2007 through 2014 (most current data available). That jumped to 8.8 million consistent participants for the period from just 2010 through 2014, likely due to the rapid rebound in both benefits offerings and utilization after the recession ended.


By the end of the full sample period, roughly a quarter (26.9 percent) of participants in the consistent group had a 401(k) balance greater than $200,000, and another 19.3 percent had between $100,000 and $200,000 in total assets. In contrast, only 10.7 percent of the broader EBRI/ICI 401(k) database, which includes participants and plans entering and leaving, had accounts with more than $200,000, and just 9.5 percent had balances between $100,000 and $200,000. Similarly, the average 401(k) account balance of the consistent participant group was more than twice that of the broader database ($170,290 vs. $76,293), and the median was more than four times as high ($87,418 vs. $18,127). The consistent group’s higher average age and tenure likely helped but ongoing participation also appeared to have provided a noticeable boost to asset growth over the sample period. Specifically, the average account balance for consistent participants increased by 110 percent from year-end 2007 through year-end 2014, and the median account balance nearly tripled (+166 percent).


Those gains equate to compound annual average growth rates of 11.2 percent and 15.0 percent, respectively, over the 7-year horizon. The continued rebound in the stock market during the sample period of course played a big role in this growth but consistent 401(k) participants again easily outperformed the broader group thanks to added help from steadier plan contributions and lower overall withdrawal and loan activity. Moreover, ongoing 401(k) participants’ exposure to equities declined less than the control group’s and therefore allowed for a better recovery from the cycle lows in the stock market. Altogether, this is another report which provides evidence of how longer-term investment time horizons coupled with the accumulation effect of ongoing 401(k) participation can together help smooth out return profiles and maximize portfolio performance.



Sources: Employee Benefits Research Institute, Investment Company Institute

Post author: Charles Couch