401(k) plan consistency pays off: Study

What happens if an employee participates regularly participant in their 401(k) plan? A lot, according to a new report from EBRI entitled, What Does Consistent Participation in 401(k) Pans Generate?

After looking at 1.3 million participants in the EBRI/ICI 401(k) database over a nine-year period from 2010 to 2019, researchers found that the average account balance increased at a compound annual average growth rate of 15.6%, rising from $58,658 to $216,690. In addition, the median 401(k) plan account balance for consistent participants increased at a compound annual average growth rate of 18.8 % over the same nine-year period, to $108,433 at year-end 2019. Growth in account balances for consistent participants generally exceeded the growth rate for all participants in the EBRI/ICI 401(k) database.

Not surprisingly, the report notes that 401(k) plan account balances tended to increase with both age and tenure among the consistent group of participants.

Younger participants or those with shorter job tenures at their current employers tended to have smaller account balances, while those who were older or had longer job tenures tended to have higher account balances. For example, within the consistent group, among 401(k) participants with more than 10 to 20 years of tenure at year-end 2019, older participants tended to have higher balances than younger participants. Those in their 30s with more than 10 to 20 years of tenure had an average account balance of $115,692, compared with an average of $143,707 for participants in their 60s with more than 10 to 20 years of tenure.

Among consistent participants in their 60s at year-end 2019, those with more than 5 to 10 years of tenure had a lower average 401(k) plan balance ($133,398) than those with more than 30 years of tenure ($408,090).

The report goes on to say that participants who were younger or had fewer years of tenure experienced the largest percent increases in average account balance between year-end 2010 and year-end 2019. For example, the average account balance of 401(k) participants in their 30s rose 700.5% (a 26.0% percent compound annual average growth rate) between the end of 2010 and the end of 2019.

Because younger participants’ account balances tended to be smaller, their contributions produced significant percent growth in their account balances. In contrast, the average account balance of older participants, or those with longer tenures—both of whom tended to have larger balances at the beginning of the study period than younger workers or those with shorter tenures—showed more modest percent growth in account size. For example, the average account balance of 401(k) participants in their 60s increased 181.8% (a 12.2% compound annual average growth rate) between year-end 2010 and year-end 2019. Investment returns, rather than annual contributions, generally account for most of the change in accounts with larger balances.

It seems investment choices are also influenced by age and tenure within the 401(k) plans. The report notes that younger participants tended to favor equity funds and target date funds, while older participants were more likely to invest in fixed-income securities such as bond funds, money market funds, or guaranteed investment contracts (GICs) and other stable value funds.

This finding is consistent with many investment patterns within 401(k) plans. Younger employees have more time before retirement to ride out market cycles whereas older workers, who are closer to retirement, are interested in preserving capital that will be needed in a short period of time.