Younger 401k plan participants tend to favor equity investing more than older participants.
That’s a key finding from a new joint study from the Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI), “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2020,” which found that at year-end 2020, 42% of 401k plan participants’ account balances were invested in equity funds, on average, in line with recent years. Another 35% of 401k participants’ account balances were invested in balanced funds, largely target date funds.
“Our research finds that younger 401k plan participants today are much more comfortable holding a significant portion of their savings in equities,” said Sarah Holden, ICI Senior Director of Retirement and Investor Research. “At year-end 2020, nearly 80 of 401k plan participants in their twenties had more than 80% of their account balance invested in equities, compared with less than half prior to the global financial crisis.”
On average, at year-end 2020, 69% percent of 401k participants’ assets were invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. Younger participants, as a group, had more than 80% of their 401 assets invested in equities, compared with 56% of 401k plan assets among participants in their sixties.
More key findings from the report:
• Ownership of investments in equities is widely embraced by 401k plan participants. Overall, 94% of 401k participants had at least some investment in equities at year-end 2020. More 401k 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.
• Target date funds continue to be a popular investment option among 401k plan participants. At year-end 2020, 86% of 401k plans, covering 87% of 401k plan participants, included target date funds in their investment lineup. Target date funds were 31% of the assets in the EBRI/ICI 401k database, and 59% of 401k participants in the database held target date funds.
• 401k plans draw in many young retirement savers and new hires. At year-end 2020, 38% of 401k plan participants were in their twenties or thirties, and 24% were in their forties. Forty-three percent of 401k plan participants had five or fewer years of tenure, including about one-fifth who were recent hires (two or fewer years of tenure).
• 401k plan loans are widely available but rarely taken. At year-end 2020, 84% of 401k plan participants were in plans allowing loans, but only 16% of participants who were eligible for loans had loans outstanding against their 401k plan, 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. Loan amounts, on average, increased in 2020, but remained small relative to the remaining account balance. Fidelity Investments also recently reported that outstanding 401k loans and average loan amounts continue to decline in 2022. Only 2.4% of participants with Fidelity initiated a new loan in Q3. In addition, the percentage of participants with a loan outstanding remained at 16.7% for Q3 2022—a significant drop, compared to 18.7% in Q3 2020 in the early days of the pandemic.
“Even during the turmoil of the COVID-19 pandemic and loosening of the regulations around plan loans in 2020, the percentage of 401k plan participants eligible to take a loan who had an outstanding loan balance declined slightly in 2020 from 2019, to a level last see in the early 2000s,” said Craig Copeland, EBRI Director of Wealth Benefits Research. “At year-end 2020, only 16% of 401k participants who were eligible for loans had loans outstanding against their 401k plan accounts, showing the ability of 401k plan participants to hold their course in preparing for retirement during unprecedented times.”
The study is based on the EBRI/ICI database of employer-sponsored 401k plans, compiled through a collaborative research project undertaken by the two organizations since 1996. The project is unique because it includes data provided by a wide variety of plan recordkeepers and, therefore, represents the activity of participants in 401k plans of varying sizes—from very large corporations to small businesses—with a variety of investment options. The 2020 EBRI/ICI database includes statistical information on 11.5 million 401k plan participants in 76,507 plans, which hold $1.0 trillion in assets, and covers 19% of the universe of active 401k participants.
Full results of the annual EBRI/ICI 401k database update are posted on each organization’s website at www.ebri.org and www.ici.org/research/investors/ebri_ici.
SEE ALSO:
• The Good, The Bad, and The Ugly: All from EBRI’s 2022 Retirement Confidence Survey
• Auto-Enrolled 401k Loan Protection Has Potential to Save $2 Trillion
• Coming Soon to a 401k Plan Near You: Personalized Target Date Accounts
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
