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The age and tenure of 401(k) participants who contributed to the same plan over an eight-year period had a significant impact on their account balance over time, according to an analysis conducted by the Employee Benefit Research Institute. The longitudinal analysis, which studied 401(k) participants who were consistent contributors to a plan from 2010-2018, highlights the 'accumulation effect' of ongoing 401(k) participation.
Over the term of the study, the average balance of 401(k) plans of consistent participants increased 183 percent from $63,756 to $181,492, resulting in a compound annual average growth rate of 13.9 percent.
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Because younger participants typically start out with smaller account balances, their annual growth rates were much higher (450.8 percent) over the study period than consistent participants in their 60s who had a more modest average growth of 122.9 percent over the term of the study.
Consistent participation helped boost account balances, according to the study. Twenty-eight percent of consistent 401(k) participants in EBRI's database had an account balance greater than $200,000 at the end of the eight-year study period, compared with 10 percent of its entire database who had a similar balance.
Nineteen percent of consistent contributors had between $100,000 and $200,000 saved in their 401(k) after eight years, compared with 9 percent of the entire database.
According to the analysis, younger participants and those with shorter tenures tended to have smaller account balances. Consistent participants in their 30s who had between 10 and 20 years of tenure had an average account balance of $90,658, compared with $129,458 for consistent participants in their sixties with similar tenure.
However, consistent participants in their sixties with tenure of only 5-10 years had account balances averaging $114,948, significantly lower than the average account balance of $363,394 for those in their sixties with 30 years of tenure.
Factors that play a role in 401(k) growth include employee and employer contributions, return on investments, and withdrawals or borrowing from saved funds.
Contributions remained relatively stable throughout the study period, averaging $352 billion per year, and less than 5 percent of active 401(k) participants borrowed from their plans, according to EBRI.
Therefore, stock market performance played a large role in the growth of 401(k) balances between 2010 and 2018, as account balances tend to be weighted toward equities, the study found.
Equities represented about two-thirds of consistent 401(k) plan participants' assets. Younger participants favored equity funds and target-date funds while older participants leaned toward fixed-income securities such as bond funds, money funds or guaranteed investment contracts (GICs) and other stable-value funds, the study said.
Investment returns varied widely over the study period, having nearly no impact in 2011 and 2015 but providing a significant boost in 2012 through 2014, 2016 and 2017 as the stock market did well. In general, between 2010 and 2018, the stock market generally rose, which had a positive impact on 401(k) account balance growth, according to EBRI.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM's Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.
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