Sticking with stocks? Younger 401(k) plan participants favor investment in equities

Equities are figuring more prominently in the portfolios of younger 401(k) participants, thanks to the adoption of target date funds (TDFs) as the default investment option in plans.

This finding is part of a new joint study from the Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI). The “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2020” study is based on the EBRI/ICI database of employer-sponsored 401(k) plans and is compiled through a collaborative research project undertaken by the two organizations since 1996.

The study found widespread ownership of investments in equities – funds invested primarily in stocks – among 401(k) plan participants, with 94% of all plan participants having at least some investment in equities at year-end 2020. More 401(k) plan participants held equities at year-end 2020 than before the global financial crisis (year-end 2007), and most had the majority of their accounts invested in equities, according to the study.

“The EBRI/ICI 401(k) data found that 401(k) plan participants tend to have age-appropriate asset allocations,” says Sarah Holden, ICI senior director of retirement and investor research. “In part, this reflects the rising use of target date funds, which are offered in 86% of 401(k) plans. Whether by active choice or accepting the default, 401(k) participants have embraced target date funds – at year-end 2020, nearly 60% of 401(k) plan participants held target date funds.”

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Younger participants tend to be invested more in equities than older 401(k) plan participants with nearly 80% of 401(k) plan participants in their 20s having more than 80% of their account balance invested in equities, compared with less than half prior to the global financial crisis. That also compares with 56% of plan assets held in equities among participants in their 60s, according to the study findings.

“The choice of the default investment option will have a significant impact on participants’ investments since participants are typically staying with this default option of TDFs,” says Craig Copeland, EBRI director of wealth benefits research. “Consequently, plan sponsors need to be aware of the impact of this choice of default investment and make decisions accordingly.”

401(k) plans draw in many young retirement savers and new hires, the report found. At year-end 2020, 38% of 401(k) plan participants were in their 20s or 30s, and 24% were in their 40s; 43% of 401(k) plan participants had five or fewer years of tenure, including about one-fifth who were recent hires with two or fewer years of tenure.

The average 401(k) plan account balance tends to increase with participant age and tenure. For example, at year-end 2020, participants in their 40s with more than two to five years of tenure had an average 401(k) plan account balance of about $43,000, compared with an average 401(k) plan account balance of more than $350,000 among participants in their 60s with more than 30 years of tenure, according to the report.

Financial education is resonating with participants

In addition, while 401(k) plan loans are widely available, they are rarely taken, even in light of the pandemic. At year-end 2020, 84% of 401(k) plan participants were in plans allowing loans, but only 16% of 401(k) participants who were eligible for loans had loans outstanding against their 401(k) plan accounts, down from year-end 2019. Loans outstanding amounted to 8% of the remaining account balance, on average, at year-end 2020, the same as year-end 2019, and well below their historical average, the report found. Loan amounts, on average, increased in 2020, but remained small relative to the remaining account balance.

This suggests that plan sponsor education around the importance of saving for the future and preserving this nest egg has resonated with 401(k) plan participants, says Holden.

“While a plan loan in certain instances may be a better option for some participants, these loans could result in unwanted cash-outs if the participant changes jobs before they are repaid,” says Copeland. “Helping participants understand the pros and cons of plan loans can result in better outcomes, both in the short-term and long-term for participants.”

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.