The ‘Secret’ to 401k Participant Success?

What should 401(k) participants do to give them the most income?

What should 401(k) participants do to give them the most income?

Consistency counts—who knew?

A recent study finds the average 401(k) plan account balance of workers who contribute consistently increased significantly over the four-year period ending at year-end 2014.

While it might seem eye-rollingly obvious, the Employee Benefit Research Institute and the Investment Company Institute provide hard numbers as to just how much of difference consistency makes.

They find average account balances increased during this period for consistent participants in all age cohorts.

“By studying the experience of workers who participate consistently across several years, this study shows more accurately the extent to which steady, paycheck-by-paycheck saving and compounding investment returns can help workers accumulate a sizable retirement nest egg,” Sarah Holden, ICI’s senior director of retirement and investor research, said in a statement.

Why Does This Sample Group Matter?

The new study’s analysis of accounts that remained in the EBRI/ICI database for an extended period gives a truer picture of the accumulation potential of 401(k)s than an analysis focused on the average account balances of all 24.9 million participants in the database.

According to the organizations, this is because 401(k) participants enter and leave the database as they change jobs or retire, and plan sponsors enter and leave the database as they change record-keepers. These activities may skew average balances downward. ICI and EBRI publish a separate, annual update report examining large cross sections of the whole database of 24.9 million participant accounts, but caution that examination of consistent participants is needed to understand the evolution of individuals’ accounts as they work through their careers.

“The extensive EBRI/ICI database provides us with an unparalleled opportunity to analyze how American workers saving in 401(k)s over time are faring,” said Jack VanDerhei, EBRI’s director of research. “The analysis used in this report controls for the impact of job changes as well as new entrants into the 401(k) system (with relatively small balances) replacing those exiting the system after years of participation.”

Key findings of the EBRI/ICI analysis of 401(k) participants include:

401(k) Participants Tend to Concentrate Their Accounts in Equity Securities

The study also found in the consistent participant analysis, as in EBRI/ICI’s broader cross-sectional analysis, about two-thirds of 401(k) participants’ assets were invested in equities at year-end 2014—whether through equity funds, the equity portion of target date and non–target date balanced funds, or company stock.

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