Asset Allocation and Continued Contributions Muted Effects of Bear Market on 401(k) Balances, Says EBRI

9/12/2003

From: Jim Jaffe of the Employee Benefit Research Institute, 202-775-6353, jaffe@ebri.org, or Jack VanDerhei, 610-525-6139, jack@vanderhei.com

WASHINGTON, Sept. 12 -- Despite falling markets, 401(k) plan participants appear to have made few changes in where their money is invested and have generally seen their accounts decline by significantly less than stock market averages, according to the latest analysis of the EBRI/ICI 401(k) database, the largest of its kind.

The average balance in a 401(k) account held at least since 1999 declined by 7.9 percent last year -- while broad stock market indexes declined by 22 percent -- and was 10 percent below the level recorded three years earlier. The average account balances of participants who are younger or have fewer years of tenure tended to increase, as contributions tend to be large relative to account balances for these workers. In contrast, the average account balance tended to fall for older participants with longer tenure. For example, accounts held by workers in their 50s posted a 14.8 percent decline over the three years ending in December 2002, and those in this group with more than 30 years of job tenure had a 24.8 percent drop.

But many younger workers, or those with shorter periods of job tenure, saw their account balances rise. Accounts held by most workers in their 20s and 30s generally increased. And workers who had less than five years of tenure in 1999 tended to have larger account balances at the end of the period than they did at the start. For these groups, new contributions often overwhelmed any market decreases. For example, workers in their 20s who had less than two years on the job in 1999 saw their account balances more than double between year-end 1999 and the end of 2002.

The analysis concludes that while a smaller percentage of 401(k) assets (down to 62 percent from 70 percent at the end of 2001) are in stocks because equity values have declined, savers have not made significant changes in allocating their 401(k) investments despite turmoil in the stock market. In addition, as observed in previous years, younger workers continue to hold a higher percentage of their 401(k) savings in stocks, while older workers tend to hold more fixed-income securities.

These findings are contained in a new report from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI), using their database that tracks the behavior of about a third of all active 401(k) participants -- or 15.5 million participants holding more than $618 billion in assets at year-end 2002. The report, published as the September EBRI Issue Brief and ICI Perspective, was written by Sarah Holden, ICI senior economist, and Jack VanDerhei, Temple University and research director of the EBRI Fellows program.

The EBRI/ICI report notes that, overall, U.S. equity markets declined by about 22 percent during 2002, but new contributions into 401(k) plans generally muted the impact of the poor market performance on participants' account balances.

Other findings include:

-- Approximately half of 401(k) participants in the EBRI/ICI database are in plans where employer stock is an investment option. At year-end 2002, of those offered this option, more than a third held no company stock, but about 14 percent had more than 80 percent of their accounts in company stock. Company stock is more commonly offered by larger employers.

-- While broad behavioral patterns appear unchanged, there have been modest shifts in allocations away from equity funds (includes equity mutual funds, commingled trusts, separate accounts, and any pooled investment primarily invested in equities). Among participants with accounts at the end of each year from 1999 through 2002, 25.9 percent of accounts included no investment in equity funds at year-end 1999 and 27.9 percent of accounts included no equity funds at the end of 2002. During the same period, the number of accounts invested entirely in equity funds dropped modestly

-- Despite the continuing volatility in financial markets and generally weak economic conditions, 401(k) plan participants' loan activity was essentially unchanged in 2002 from earlier years.

"These findings show that while market developments have clearly affected 401(k) savings balances, the losses have been less than equity market declines. It also appears that investment behavior remains unchanged," said EBRI President and CEO Dallas Salisbury.