Financial Planning, Retirement

Persistent Participation Maximizes 401(k) Performance

9/18/15 8:00 AM

iStock_000017323851_Small-1Have your retirement assets doubled since the recession? There’s a good chance that the answer is ‘Yes’ if you’ve been an ongoing participant in a 401(k) savings plan. At least that’s what a new 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. Roughly 19 percent of the 21.8 million 401(k) participants in the EBRI/ICI database had accounts at the end of each year from 2007 through 2013. By the end of this sample period, almost one in four (23.5 percent) participants in the consistent group had a 401(k) balance greater than $200,000, and another 18.8 percent had between $100,000 and $200,000 in total assets. In contrast, only 10.0 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 9.6 percent had balances between $100,000 and $200,000. Similarly, the average 401(k) account balance of the consistent participant group was twice that of the broader database ($148,399 vs. $72,383), and the median was more than four times as high ($75,359 vs. $18,433).

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The consistent group’s higher average age and employer tenure obviously 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 86 percent from year-end 2007 through year-end 2013, and the median account balance rose by 141 percent. Those gains equate to compound annual average growth rates of 10.9 percent and 15.8 percent, respectively, over the six-year period. The strong rebound in the stock market during this 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 contributions and lower withdrawal/loan activity. Moreover, ongoing 401(k) participants’ exposure to equities declined less than the control group’s over this period, which included the entirety of the “Great Recession,” and therefore allowed for a better recovery from the lows in the stock market. Altogether, this report is more 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