Participants in 401(k)s and other defined contribution (DC) plans controlled $8.1 trillion at the end of the third quarter of 2018, according to updated data from the Investment Company Institute (ICI). That was a new all-time high, represented 28 percent of all retirement assets in Q3, and equated to roughly one-tenth of Americans’ aggregate financial assets. Further, only 2.2 percent of account owners stopped making contributions to their 401(k)s and other DC plans during the first nine months of 2018, a near-cycle low, and hardship withdrawals were taken by just 1.4 percent of participants. As for borrowing activity, 16.4 percent of all account owners had a related loan outstanding at the end of the third quarter, matching the best reading since 2008.
DC plan assets climbing to a record level in Q3 is not too surprising since the S&P 500 total return index had gained roughly 10.6 percent during the first nine months of 2018. In the fourth quarter, though, the stock market experienced its worst correction in years so a marked decline in 401(k) values may be seen when ICI releases the Q4 figures. However, equities have already rebounded significantly during the start of 2019 and erased a good chunk of the damage done in the previous quarter. In fact, updated EBRI data showed that the average 401(k) account balance for younger (25-34), less-tenured (1-4 years) workers jumped by 7.5 percent in January and 3.8 percent in February, a big turnaround from December’s 4.9 percent decline. As impressive as the recent V-shaped recovery has been, 401(k) plans work even better over a longer time horizon that allows a combination of routine savings and the resiliency of the market to offset periods of elevated volatility and maximize compound growth.
Since the end of 2016, for instance, the average 401(k) account balance for younger, less-tenured workers has already surged by 109 percent, while the S&P 500 has gained just 24 percent (through the end of February 2019). Older workers (55-64) with at least five years of tenure saw their 401(k) balances rise by an average of “only” 34 percent during this same period since these individuals tend to have much larger accounts that are less sensitive to both contributions and market fluctuations. Altogether, these substantial gains should provide further evidence of how effective consistent participation in a tax-advantaged savings vehicle can be when trying to amass a large retirement nest egg. Additional assistance is available through the use of dollar-cost averaging and regularly consulting with a professional financial advisor.
Sources: ICI, EBRI
Post author: Charles Couch