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401(k) Balances Increased, but So Did Loans Outstanding
Consistent participants saw a 10.5% average annual growth rate over a six-year period

By Stephen Miller  12/1/2010
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Although the average 401(k) account balance fluctuated with stock market performance between 2003 and 2009, for consistent participants the data showed an average annual growth rate of 10.5 percent, reaching $109,723 at year-end 2009—up from $61,106 at year-end 2003, according to a report by the not-for-profit Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI), an industry association.

The November 2010 report, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity, is based on an EBRI/ICI database with records on 20.7 million participants at year-end 2009, including 4.3 million consistent participants—those who had 401(k) accounts with the same 401(k) plan from year-end 2003 through year-end 2009. The changes in 401(k) participant account balances reflect continuing worker contributions, employer contributions, investment gains and losses, and loan or withdrawal activity.

Plunge and Recovery

The average U.S. 401(k) balance rose nearly 32 percent in 2009, more than making up for the massive losses of 2008, according to the report. But more participants took loans against their 401(k)s—a trend that could lead to a decrease in retirement savings.

The 31.9 percent recovery in 2009 was in line with the 2003–2007 pattern of steady increase in account balances and in contrast to the 27.8 percent plunge in 2008, during the financial crisis.

“Looking at consistent participants provides insights into the powerful impact of ongoing participation in 401(k) plans,” said Sarah Holden, ICI senior director of retirement and investor research. “Retirement savers, by continuing to invest paycheck by paycheck, saw the benefits of being in the market in 2009 as stock values generally climbed during the year.”

Increase in Loan Activity

The study found that at year-end 2009, 21 percent of 401(k) participants in plans offering loans had loans outstanding—up from 18 percent at year-end 2008 and year-end 2007. At year-end 2009, 89 percent of 401(k) participants were in plans offering loans. Studies show that taking money out of a 401(k) plan, even if it is repaid eventually, can have a major impact on overall account size at retirement. (To learn more about how loans and withdrawals reduce participants' retirement savings, see the SHRM Online article "One in Four Withdraw Retirement Account Funds Early—and Pay the Price.")

More Assets in Target-Date Funds

In 2009, more than three-quarters of 401(k) plans included target-date funds in their investment lineup. At year-end 2009, nearly 10 percent of the assets in the EBRI/ICI 401(k) database were invested in target-date funds and 33 percent of 401(k) participants held target-date funds. A target-date fund typically rebalances its portfolio to become less focused on growth and more focused on income as it approaches and passes the target date of the fund, which is usually included in the fund’s name.

“401(k) participants continued to embrace target-date fund investing in 2009,” said Jack VanDerhei, EBRI director of research. “Although target-date funds represent only one-tenth of 401(k) assets, the data highlight the significant role that they play in individual participants’ accounts, particularly recently hired and younger employees who are increasingly using target-date funds to save for retirement.” (To learn more, see the SHRM Online article "Plan Sponsors Misunderstand Target-Date Funds.")

Less Invested in Company Stock

The analysis of recent hires showed they tended to hold more of their assets in balanced or target-date funds compared with earlier time periods. At the same time, the share of 401(k) accounts invested in company stock continued to shrink, falling by half of a percentage point to 9.2 percent in 2009. That continued a steady decline that started in 1999. Recently hired 401(k) participants contributed to this trend; generally they were less likely to hold employer stock. 

Vanguard: Examine Loans in the Right Context

A 2010 report by Vanguard Investments finds that issuance of loans from its defined contribution plans rose sharply in 2009 but had dropped in each of the four previous years.

"You always need to normalize the numbers—especially if your participant base grows," said Jean Young, senior research analyst in Vanguard Center for Retirement Research and lead author of Vanguard's report, How America Saves. "Also, you shouldn't analyze too short of a trend line," she said. "Yes, we know loans went up in 2009 versus 2008. But that was after four consecutive years of decline in the number of loans. "

In 2009, new loans from Vanguard record-kept defined contribution plans spiked by 19 percent compared with 2008. But the number of loans in 2010 was up just a modest 4 percent compared with 2009, and participants initiated fewer new loans in 2010 than in each year from 2003 through 2006.

Loans Can Encourage Participation

"It's also important to note that loans can have a beneficial effect on retirement savings because they may encourage plan participation among newly eligible employees," according to Vanguard.

"Research shows that loan use is highest among participants who earn less than $30,000—almost 25 percent of these participants have an outstanding loan. ... As long as these participants don't default on their loans (and our figures show that 90 percent of loans are repaid in full), those who earn less than $30,000 and have borrowed from their retirement savings may actually be better off in the long-term than those employees who earn less than $30,000 and do not participate in their employer plan," Vanguard states.

Stephen Miller is an online editor/manager for SHRM.

Related Article:

Pointers for Designing an 'Ideal' 401(k) Plan, SHRM Online Benefits Discipline, November 2010

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