Sunday, July 08, 2012

“Consistent” Messages

By some accounts, inertia has long been the bane of the voluntary retirement system—and a great deal of money and time has been spent overcoming the reluctance of workers to become savers, and of savers to do so at levels sufficient to achieve their retirement goals.

That same inertia likely accounts for the fact that, once set on a savings course, or better still, set on one that improves on that initial setting,1 participants in overwhelming numbers appear to “stay the course”—and do so through good times and times that aren’t as good.

So, what happens to those participants who stay the course, those“steady,” consistent participants?

The Employee Benefit Research Institute (EBRI), through the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project, has long tracked the changes in consistent participant accounts in a database that is the largest, most representative repository of information about individual 401(k) plan participant accounts in the world.2 The EBRI/ICI project is unique because it includes data provided by a wide variety of plan recordkeepers and, therefore, portrays the activity of participants in 401(k) plans of varying sizes—from very large corporations to small businesses—with a variety of investment options.

Drawing from that database, which includes demographic, contribution, asset allocation, and loan and withdrawal activity information for millions of participants, EBRI has for years produced estimates of the cumulative changes in average account balances—both as a result of contributions and investment returns—for several combinations of participant age and tenure.

And, for those millions of individual participant accounts in the database, we are able to project changes in those average balances based on actual individual rates of contribution and the investment choices in place at a specific point in time.3

As a result, we are able to estimate that the average account balance of an individual ages 2534, with one to four years of tenure at his or her current employer,4 increased 4.6 percent in June, while a participant ages 5564 with 2029 years of tenure had an average account increase of 2.5 percent.5

This capability is significant for several reasons. It provides a monthly update of a comprehensive perspective on 401(k) account movement. It has provided the ability to quickly and accurately estimate the impact of major market swings on a broad swathe of the 401(k) market.6

And it serves to remind us that those 401(k) balances are affected not just by the investment markets, but by the savings we invest—consistently.
-Nevin E. Adams, JD

You can access reports of both cumulative and monthly average account changes at

1 Via plan design devices such as automatic enrollment, contribution acceleration, or asset allocation funds that rebalance automatically over time.

2 As of December 31, 2010, the EBRI/ICI database included statistical information on about 23.4 million 401(k) plan participants, in 64,455 employer-sponsored 401(k) plans, representing $1.414 trillion in assets.

3 That specific point in time being the annual update of recordkeeping information from data providers, currently 12/31/2010. The projections assume no change in behavior (such as deferral rates or interfund transfers).

4 For individual participants in the database from December 31, 2010 to the valuation date of June 30, 2012.

5 Note that that increase is based on not just investment returns, but also new contributions. Note also that contributions tend to have a larger percentage impact on the rate of growth in smaller accounts.

6Perhaps most notably for an Oct. 7, 2008, congressional hearing on “The Impact of the Financial Crisis on Workers’ Retirement Security.” See EBRI’s testimony online here.

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